NEW YORK — Credit Suisse has raised its target price on Pinnacle Foods Inc. to $68 per share from $64, noting in an April 25 research report that industry logic for more consolidation in the frozen foods category and the relatively “unentrenched” nature of the company’s management team increase the likelihood of a sale.
The action taken by Credit Suisse comes just a few days after investment company JANA Partners L.L.C. took a 9.1% stake in Pinnacle Foods, a move that sent the Parsippany, N.J.-based company’s share price soaring. In an April 19 filing with the U.S. Securities and Exchange Commission, JANA Partners said the investment was made because the firm views Pinnacle Foods as being undervalued.
In his April 25 research note, Robert Moskow, research analyst at Credit Suisse, indicated that the move made by JANA may flush out Chicago-based Conagra Brands, Inc. as a potential buyer for Pinnacle Foods.
“Rather than take the risk of Pinnacle pursuing a formal auction and attracting the attention of much bigger competitors (like Kraft Heinz or Nestle, for example), Conagra might consider taking a more proactive approach and make a formal bid,” Mr. Moskow wrote. “Conagra has expressed interest in buying Pinnacle in the past, and it knows (based on how its stock traded last year) that the market would take a positive view if it consummated an acquisition. A scenario where a bigger company with deeper pockets outbids it for such an obvious strategic asset would hurt quite a bit. JANA, of course, is in a unique position to help bring the two companies together given that one of Conagra’s board members (Bradley Alford) comes from the slate JANA proposed in 2015.”
The list of potential buyers is not limited to Conagra, though, Mr. Moskow said. He said Kraft Heinz and Nestle may have interest, though the probability of a serious bid is most likely low.
“Kraft Heinz has stated its intention to pursue businesses that can help it expand internationally rather than domestic businesses like Pinnacle,” he explained. “In addition, Pinnacle’s lean operations would not offer much in the way of savings from overhead cost reductions. Nestle has stated its intention to hold onto its U.S. frozen business rather than sell it, but most of Pinnacle’s portfolio goes against the company’s health and wellness criteria.”
Meanwhile, Mr. Moskow said Tyson Foods, Inc. and Hormel Foods Corp. are “long-shot bidders” due to their focus on protein.
Perhaps most key to any activity is the fact that the management team at Pinnacle Foods appears open to a transaction, Mr. Moskow said.
“While Pinnacle clearly has a strong stand-alone business with M.&A. potential of its own, its management team certainly must recognize that the cost of doing business (e.g. freight costs, interest rates, promotional spending) has increased significantly,” he said. “Valuation multiples for packaged food peers have fallen considerably while the valuations for the assets it wants to buy remain high. Who would blame the board for pursuing a sale in circumstances like these?”
During fiscal 2017, Pinnacle Foods earned $532,040,000, equal to $4.50 per share on the common stock, a significant rise compared with the same period the year before when the company earned $211,117,000, or $1.81 per share. The rise in net income was due in part to the tax legislation passed in December 2017, which the company said meaningfully affected items of comparability, and the benefit of a 53rd week in fiscal 2017.Sales for the year were $3,144,002,000, up from the prior year when the company generated $3,127,938,000 in sales.