Some Perspective On A Possible Pinnacle Foods Buyout

In a Thursday 13-D filing, Jana Capital Partners disclosed a 9.1-percent stake in PINNACLE FOODS INC Common Stock PF.

The hedge fund said it intends to engage in discussion with Pinnacle Foods' board and management team regarding value creation measures — including operations, costs and margin execution, capital allocation and capitalization — and evaluation of strategic alternatives, including a sale or other consolidation opportunities.

The Analyst

Stifel analyst Christopher Growe maintained a Buy rating on Pinnacle Foods with a $63 price target.

The Thesis

Jana Partners' overture is surprising given that Pinnacle Foods is one of a handful of food companies operating at strong level, Growe said in a Thursday note.

Pinnacle has a strong growth outlook for 2018 and will likely execute against its gross margin improvement program, which envisages 300-400 basis points of gross margin expansion by 2020, the analyst said. 

The takeout appeal lies in Pinnacle's frozen food business, led by Bird's Eye, Growe said. Conagra Brands Inc CAG could be interested in Pinnacle's frozen portfolio, which could provide significant synergies for the combined company, he said. 

"We believe a combination of Conagra and Pinnacle would create significant synergies and an acquisition in the $75 per share range for Pinnacle would produce upwards of 25-percent EPS accretion for Conagra by our estimate and including a strong rate of synergy realization." 

In the event of a takeout, significant upside could be realized from Stifel's $63 price target, "likely in the mid-to-upper $70 range," Growe said. 

The Price Action

Pinnacle Foods shares are down 6.7 percent year-to-date through Thursday.

The stock was rallying 8.15 percent to $59.70 at the time of publication Friday. 

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