ConAgra Will Buy Pinnacle Foods in an $11 Billion Deal

Plenty of companies out there are less well-known than the brands in their stables. Case in point: It would be understandable if you didn't know much about either ConAgra (NYSE: CAG) or Pinnacle Foods (NYSE: PF).

But as host Chris Hill and Motley Fool CIO Andy Cross point out in this segment from MarketFoolery, one owns Birds Eye, and the other owns Healthy Choice -- two familiar names that have probably made it into your shopping cart on plenty of occasions. Now they will become one company. The duo consider the trends in the packaged food segment that make such mergers look tempting to the companies involved, and what this one means for shareholders and consumers.

A full transcript follows the video.

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This video was recorded on June 27, 2018.

Chris Hill: Let's move on to the deal of the day, and that is ConAgra, which has reached a deal to buy Pinnacle Foods for just under $11 billion in cash and stock. That assumes the debt. You're basically seeing two numbers today -- $8.1 billion for the deal; but when you throw in the debt, it gets it up to just under $11 billion. In terms of, these are two huge conglomerates. The result here would be the second-largest frozen food company in the United States. One way to think about this is, if you're consumer and you're going down the frozen food aisle, the company that owns Healthy Choice is buying the company that owns Birds Eye.

Andy Cross: [laughs] Right. Among other brands. This is just more evidence that the consumer packaged goods companies, CPG companies, are under more and more pressure to try to boost sales growth any way they can. These are, like you mentioned, multibillion-dollar organizations. They do multi-billion dollars in sales. Their brands are not the freshest thing in the world, and there's been some criticism CPG companies, that they are not refreshing their brands. The power of food brands is not what they once were, in my opinion, and I think we've seen that over the years, with some of these big, large companies -- whether it's Kraft or others -- struggling to be able to grow the top line. So, consolidating, making acquisitions.

In this case, like you mentioned, Conagra generates north of $800 million in profits every year. They spend a lot of money buying back stock. They pay a little dividend, so they have the capital to put to use. They're going after a company like Pinnacle Foods, which is about half the size. Leveraging up the balance sheet a little bit more, as they will have to do, but they can probably afford it.

It's just not the fastest-growing business. In my mind, those businesses are going to continue to be under pressure from the likes of an Amazon-Whole Foods having much more pricing power than what these companies may have had in the past, with those brands not being quite as valuable. We're seeing that in the marketplace. The valuations just aren't all that exciting.

Hill: As you said, Conagra has been a good operator. They do turn out those profits every year. Shares of Conagra down about 8% on this news. I'm wondering, is that a sign that people think they're paying too much for Pinnacle? Or, as you indicated, is it a sign of, this is about the toughest industry going right now?

Cross: I think it's probably the latter. The price for Pinnacle, I wouldn't say it's a steal, but it's not exorbitant. In my mind, this space is in a tough spot right now. It's much more of a value paradise. You're going to get a little bit of a dividend yield from some of these companies. You'll get them buying back stock. You'll get a few growth numbers at the top line, maybe somewhere in the neighborhood of GDP, maybe a little bit higher. And then they can wring out profits, drive cash flows, drive profits for investors, buy back stock, and pay those dividends. There are some investors who may like that.

Personally, in a world where the S&P is now 26% technology-driven, and that will only increase over time, in my mind, looking out at the next three to five years, these CPG companies are just going to have higher and higher hurdles to be able to compete against a world that is moving less and less in their favor. And, the competitive pressures from the supermarket space, from other consumer companies, upstart companies that are coming aggressively against them. The headwinds facing them are a little stiffer now than they were ten, 15, 20 years ago.

Hill: One little piece of that, of how it's a little bit more challenging now, is, you go back 20 years. One of the arguments in favor of these types of companies -- whether we're talking about Conagra or Pepsi Frito-Lay, that sort of thing -- was their ability to negotiate shelf space with the grocery stores. So, you could look at this deal and say, "Oh my gosh, when it comes to the frozen food aisle, this combination of Conagra and Pinnacle Foods is going to have tremendous leverage against the grocery stores!" I mean, it's an advantage, it's just less important than it used to be.

Cross: It is. And with online sales, I mean, just look at the competitive space. Much like we're seeing in the airline industry, when players and companies became much more rational, same with the grocery market. Whether it's Wegmans, one of the best operators out there, or Whole Foods, now Amazon, running a retail operation and being extremely price-conscious. As we all know, going against Jeff Bezos on the pricing level doesn't work out very well for many people.

These companies, I think, are just seeing the market dynamics and trying to figure out, how can they best compete in a world of the competitive pressures, as well as trying to figure out, "We have a nice multibillion-dollar business that generates nice profits. How do we maintain those profits, and how do we invest those into shareholders?" And they have done that a little bit.

But like you mentioned before, today, the stock price is down. The stock price over the last three years for both of these companies, not all that exciting. Investors have gotten a little bit of a dividend yield, but they really haven't gotten a lot of capital appreciation. In my mind, I think that will just be harder and harder to come by in the future.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross owns shares of PEP and KHC. Chris Hill owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.