- Post Holdings recently met with ConAgra to discuss a potential merger with ConAgra's Lamb Weston frozen potato business, people familiar with the matter told The Wall Street Journal.
- While those talks have halted for now, they could start back up again once ConAgra finalizes plans for spinning off Lamb Weston from its consumer brands, which the company announced late last year, the sources said.
- The deal structure would have been what's known as a Reverse Morris Trust, a tax-efficient transaction in which a company (here, ConAgra) breaks off part of its business and merges the spinoff with another similarly-sized company, according to the sources. Lamb Weston was reportedly valued at about $6 billion, and Post's market value was about $4.9 billion as of Tuesday afternoon, The Wall Street Journal reported.
That $6 billion valuation for Lamb Weston is notable considering the $2.9 billion value ascribed to it when ConAgra initially made the spinoff announcement back in November. ConAgra has been expanding production for the business, including a $30 million investment in the Boardman, OR, facility, announced in March, and a $200 million investment in the Richland, WA, facility, announced earlier this month.
But more than doubling the original valuation for Lamb Weston could show confidence in the potential growth for the frozen potato category. Post supported its cereal category with its $1 billion acquisition of MOM Brands last year, and that acquisition has made significant contributions to profits and revenue since, including the latest quarter.
But Post hasn't shied away from acquisitive growth in other categories, including its $2.5 billion acquisition of egg and dairy producer Michael Foods in 2014. Michael Foods struggled when the bird flu outbreak slammed the egg and poultry industries last year. A Lamb Weston merger would be the biggest deal for Post to date, and it would further diversify the company's portfolio with little overlap to protect overall revenue and profitability from an individual segment's declines.
The deal could be even more promising for ConAgra and its shareholders. Whether ConAgra spins off Lamb Weston or merges it with Post (or any other company), investors could see double their sets of shares. Weighing merger negotiations at the same time as pursuing spinoffs or initial public offerings isn't uncommon, and it allows the company and shareholders to select the best option, according to The Wall Street Journal.
The company has been rapidly shedding businesses over the past year, including private label brands, Spicetec, and JM Swank. ConAgra may continue to divest unwanted segments as it becomes more focused on consumer brands, though the Reverse Morris Trust strategy could better preserve profitability in the transition period.