Undisciplined Bidding for 2012 Acquisition Soon Led To Poor Results
At the time we sold our shares in mid-2011, Omaha-based food company ConAgra had been a long-term holding of America First Investment Advisors. The company was in the news recently when an activist investor group named Jana Partners notified the Securities & Exchange Commission (SEC) that they own just over 7% of the shares outstanding. Jana has a history of investing in poorly performing companies and pressuring managements to take steps to improve results.
Rodkin’s Infatuation With Ralcorp Hurts Shareholders
Jana traces recent profit weakness at ConAgra to the company’s purchase of private-label food company Ralcorp in 2012. We agree. In fact, our decision to sell ConAgra was prompted by former CEO Gary Rodkin’s undisciplined pursuit of Ralcorp. Infatuated by the growth of private label products at such popular retailers as Trader Joe’s, Rodkin publicly offered a high price for Ralcorp and signaled that he was willing to pay even more. Indeed, he eventually paid far more to buy the company in 2012, even though Ralcorp had spun off its large Post cereals business and had warned that profits were being hurt by rising costs.
ConAgra Violates Our 3-Part Test
We look for three things when evaluating an investment: 1) a business with good economics; 2) shareholder-minded management; and 3) an attractive stock price. The willingness of management to pay an irrational price for Ralcorp led us to conclude that ConAgra no longer met our criteria and should be sold.
Operating results at ConAgra began to decline shortly after the purchase of Ralcorp. Rodkin admitted that he hadn’t realized the extent of the operating issues that faced Ralcorp, including the need to build a new information technology system to coordinate the many businesses that Ralcorp had acquired. To keep customers happy, management felt compelled to offer big price discounts, which hurt profits and made it impossible to get an adequate return from their acquisition. Making matters worse was that consumers showed an increasing willingness to turn away from the packaged foods that ConAgra was selling in favor of more organic and fresh fare.
Pro-Shareholder CEO Is Hired
As results continued to disappoint, Rodkin announced in August 2014 that he would retire the following May. After a search, the ConAgra board of directors in February named former Hillshire Brands CEO Sean Connolly to replace him. Hillshire owned some of the food businesses that were once part of conglomerate Sara Lee.
When management reported earnings at the end of June, Connolly announced his intention to sell the private-label food business. Profits had fallen a whopping 30% from the year before. During an earnings conference call, he made it clear that he will follow the same script he had used at Hillshire Brands. This means big cost reductions, changes to the lineup of companies they own, and stepped-up investment in the more promising areas of the current portfolio.
Importantly, he also said suggested that “I’m very open, my Board is very open to alternative ways of creating value should one come along that is clearly superior to our base plan . . .” We read that as management-speak for a willingness to sell the whole company if the right offer comes along. This is exactly what happened at Hillshire Brands, which was acquired by Tyson Foods last year.
Barry Rosenstein, the principal owner of Jana Partners, said he was encouraged by the plans that Connolly outlined. In their SEC filing, Jana said they were considering nominating directors to the ConAgra board. Just yesterday, both sides agreed to add two directors. The Company will continue to be under pressure to make improvements that will create value for shareholders.
ConAgra management seems to have improved greatly since we sold our shares in 2011. We have not added the company to our recommended list and may not do so, but management is no longer an obstacle.
Barry Dunaway, CFA®
Executive Vice President & Director of Research
America First Investment Advisors, LLC
This post expresses the views of the author as of the date of publication. America First Investment Advisors has no obligation to update the information in it. Be aware that past performance is no indication of future performance, and that wherever there is the potential for profit there is also the possibility of loss.