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Conagra Brands & Pinnacle Foods Deal Talks Back in Focus

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There was a lot of hearsay about Conagra Brands, Inc. (CAG - Free Report) trying to strike a deal to buy Pinnacle Foods Inc. , which sent shares of the latter up by 2.3% in yesterday’s trading session. If the consolidation materializes, it is likely to create a robust frozen foods entity at a time when demand for this category is booming. However, both Conagra and Pinnacle Foods have remained silent on the matter.

Sources revealed that this is the second time when Conagra approached Pinnacle Foods for a deal, after a failed attempt last year. Apparently, Conagra made an offer to take over Pinnacle Foods last year, though nothing came out of it as the two entities could not settle for a common price.

Coming back to yesterday’s development, it looks like the aforementioned deal came shortly after Jana Partners’ stake disclosure in Pinnacle Foods. Well, there were rounds recently that the activist hedge fund, Jana Partners, revealed nearly 9% stake in Pinnacle Foods and had plans to discuss various matters with the company, including a conceivable divestiture. Sources also revealed that per Jana Partners, Pinnacle Foods is well positioned for consolidation, given its solid frozen foods business.  

Conagra-Pinnacle Foods Deal Prospects

Given the surging demand for frozen foods, such a deal seems to be a deemed fit for Conagra, which has been undertaking constant efforts to revamp its business via modernized buyouts and strategic divestitures. Evidently, the company spun off Lamb Weston Holdings (LW - Free Report) in 2016 and acquired parents of Angie's Boomchickapop and Duke's meat snacks. The company remains committed toward making brand renovation initiatives investments to strengthen its frozen business, in an attempt to boost sales of Refrigerated & Frozen segment.

At such a juncture, buyout of Pinnacle Foods is likely to be beneficial, given its remarkable growth in the frozen foods space. In the first quarter of 2018, sales from Pinnacle Foods’ Frozen segment increased 7.5% to $344.9 million on account of favorable volume/mix, net price realization, currency impacts and earlier Easter timing. Performance of the Frozen segment strongly benefitted from Birds Eye franchise during the quarter, which drove in-market performance. Markedly, Frozen segment represented about 44.2% of the Zacks Rank #3 (Hold) company’s total sales. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, in the Grocery segment, strong performance of Vlasic pickles, Armour canned meat, and Duncan Hines baking products and syrups business drove sales. Clearly, frozen foods business offers solid growth prospects, which also makes it one of the hottest spots for conducting mergers and acquisitions. This is also evident from Nomad Foods’ (NOMD - Free Report) recent contract to acquire UK’s frozen food company, Aunt Bessie’s Limited.



All said, let’s wait and see if Conagra actually ends up buying Pinnacle Foods, which will likely gain from the former’s scale, resources and notable presence in the frozen foods category. However, Conagra currently carries a Zacks Rank #4 (Sell) and has been battling input cost inflation that is hurting its margins. Nonetheless, the company’s focus on innovations, brand reinventions and efforts to boost top line should help offset these hurdles. These efforts should fuel further growth at the stock that has gained 1.6% in the past six months, against the industry’s decline of 7.6%.

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