Morningstar | No Change to Outlook for Pinnacle After Earnings as Conagra Acquisition Remains On Track
After it posted second-quarter results, we are maintaining our $66 per share valuation for no-moat Pinnacle Foods. The company’s pending acquisition by narrow-moat Conagra for $43.11 in cash and 0.6494 shares of the acquirer's stock remains on track, and Pinnacle continues to expect the transaction to close by the end of the year. We continue to see the acquisition thesis as intact--Conagra will become the number two player in the domestic frozen food category while strengthening its brand portfolio and extracting cost savings. We do not expect the acquisition to materially impact Conagra's competitive positioning, though adding Pinnacle's strong frozen food, gluten-free, and, to a lesser extent, baking brands should make the firm marginally more valuable to retailers. Our valuation represents the discounted value of the roughly $67 per share in value that Conagra is offering, assuming the deal closes in late 2018.Pinnacle reported a second-quarter net sales decline of 0.4%, though the shortfall was attributable to the timing of Easter; sales rose 1.1% excluding the impact of the holiday shift. The firm's specialty, Boulder, and frozen food units were particularly strong, driving Pinnacle's adjusted EBIT margin up 100 basis points (to 16.3% of sales) compared with last year.
We are not surprised by media reports that Kraft Heinz declined to bid on Pinnacle given its valuation, and believe that the packaged food juggernaut is not alone in seeing little value in pushing bidding higher. We believe Conagra's offer for Pinnacle is fairly priced with potential synergies unlikely to justify a higher valuation. Consequently, we neither expect the deal to fall through for regulatory or other reasons, nor do we foresee the emergence of a competing bidder.
Pinnacle Foods is a holding company. The company is a manufacturer, marketer and distributor of convenience food products. The company's operations are managed and reported in four operating segments: frozen, which is comprised of the retail businesses of the company's legacy frozen brands, including vegetables, complete bagged meals, frozen dinners and entrees, among others; grocery, which is comprised of the retail businesses of the company's grocery brands; boulder, which is comprised of the retail businesses of the company's health and wellness lifestyle brands; and specialty, which includes the company's snack products (Tim's Cascade and Snyder of Berlin) and all of its U.S. foodservice and private label businesses.
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