Pinnacle warns of 'intensified competition' in grocery as Conagra deal nears
- Pinnacle Foods, which is being acquired by Conagra Brands, expects net sales during the third quarter of $740 million to $745 million, compared to $749.8 million in the same period a year earlier. The forecast was below the FactSet consensus of $763 million.
- The maker of Duncan Hines, Mrs. Butterworth's and Mrs. Paul's said the 1% drop in sales was "primarily due to intensified competition, particularly in the grocery segment." Pinnacle said these challenges were partially offset by strength in its frozen division, led by the Birds Eye brand.
- Separately, Conagra Brands said Tuesday it would issue $575 million in common stock to help fund the Pinnacle deal. Pinnacle shareholders are expected to vote on the merger Oct. 23.
With Conagra's nearly $11 billion purchase of Pinnacle set to close this month, the latest preliminary numbers from the maker of Birds Eye, Duncan Hines, Hungry-Man, Log Cabin, Vlasic and Wish-Bone are indicative of why it was being targeted in the first place: frozen.
Once largely forgotten at the grocery store, innovation and demand for products with premium ingredients and trendy flavors have thrust frozen back into the spotlight, likely a major reason Conagra wanted to add Pinnacle to its fold. In Tuesday's 8-K filing, Pinnacle indicated demand for frozen shows no sign of dissipating, providing further support for Conagra to complete the deal. Last month, Conagra surprised Wall Street with first-quarter earnings that missed expectations, results the company blamed on a "challenging inflationary environment."
Pinnacle, which Conagra reportedly had eyed for years, has a large presence in frozen, with well-known brands including Hungry-Man, Evol, Van de Kamp's and Mrs. Paul's. Conagra will fold these brands into its frozen portfolio, which includes Banquet, Healthy Choice and Marie Callender's. The combination of Conagra and Pinnacle creates a company that would be the second-largest in U.S. frozen foods, behind Nestlé.
"We look forward to executing our proven approach to innovation and brand-building to enhance their portfolio of leading brands and drive long-term shareholder value," Sean Connolly, Conagra's CEO, said in a statement last month.
In its third quarter preliminary results, Pinnacle underscored an ongoing challenge plaguing many food companies today: center store remains a difficult environment, prompting stiff competition when it comes to the big players fighting for market share and growth. Pinnacle didn't specifically address which products were being hit the hardest in its grocery segment, but it's likely that brands including Duncan Hines cake mixes and Armour Star canned meats are among those feeling the greatest impact as shoppers flock toward fresher, less processed foods.
Still, Brittany Weissman, an analyst at Edward Jones, told Food Dive last week that the deal was good for Conagra. The company in recent years has jettisoned its private label business and frozen potato company Lamb Weston to focus on its core brands, using M&A to bulk up in areas such as snacking and frozen where it already had a commanding presence.
"This is something that has probably been well vetted, and they’ve kind of seen the complements in that business for a long time," Weissman said. "I do think there are a lot of synergies."
With the deal expected to close later this month, Conagra said Tuesday it would issue $575 million in common stock to fund the acquisition — which, based on Monday's closing price, would equal about 16.6 million shares. While share dilution is generally frowned on Wall Street, the fact that Conagra's stock rose following the news shows many believe this is a deal the company needs to make as consumer tastes change and legacy food companies struggle to keep pace.
- Pinnacle Foods Inc. Pinnacle Foods Inc.
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