The for-sale indicators may shortly be going up at Lamb Weston Holdings judging by the language utilized by activist investor Jana Companions.
And patrons may successfully be rejoicing as a result of the shares in one in every of many world’s largest French fries suppliers have slumped 27% this yr on the New York Stock Alternate. They rallied larger than 10% closing Friday, when the activist revealed it had paid $336m for a 5% stake nevertheless have since retreated.
Market context throughout the slide will be successfully positioned. The issue is, Lamb Weston’s nearest opponents – McCain Meals and JR Simplot – are every privately-owned. The shares have fallen an additional 2% this week to $77.38 as of the shut of play on Thursday (24 October), as compared with spherical $106.50 initially of the yr.
Nonetheless, little doubt all three are experiencing the similar subdued restaurant website guests in North America as clients proceed to prioritise consuming at home amid tight household budgets.
McDonald’s, for example, is Lamb Weston’s largest purchaser, accounting for 14% of its $6.5bn fiscal 2024 product sales revenues. Nevertheless, given that start of the yr, Lamb Weston has moreover reported softness elsewhere, in retail, the place it performs in branded frozen merchandise and private label.
For Lamb Weston, nonetheless, the tough setting has been compounded by totally different factors – a $71m write-down on raw potato inventories as a result of it overestimated a pick-up in shopper demand and points implementing a model new ERP system, resulting in a reduce in product sales and income forecasts in April.
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One different downgrade adopted earlier in October, with internet earnings and EPS targets slashed by north of 30% each, although product sales estimates have been left alone on the first-quarter reporting stage of the 2025 financial yr.
Jana Companions acknowledged closing week Lamb Weston’s shares have been “undervalued and symbolize a fairly funding different”, citing the “litany of self-inflicted missteps which have led to underperformance for shareholders”.
These suggestions obtained right here inside weeks of Lamb Weston revealing the closure of its Connell, Washington, plant with the dearth of a complete bunch of jobs and further to return amid plans to cut 4% of the general workforce. Manufacturing at totally different web sites will be being curtailed until the mismatch between present and demand peters out.
Disposal odds
Nevertheless what could Jana Companions overarching intentions be? It’s frequent in such circumstances to declare nominees to the aim agency’s board of directors to press for change in protection or administration.
Jana Companions efficiently did that in its submitting with the US Securities and Alternate Charge (SEC), naming 5 “shareholder nominees” inside its multi-point advocacy plan put to Lamb Weston, which instructed in a response that it will “have in mind” the investor’s views.
However, throughout the strongest indication {{that a}} sale may be the favored selection, Jana Companions acknowledged it’ll pursue an “initiation of a consider of strategic choices, notably given the historic previous of curiosity throughout the issuer [Lamb Weston] and the issuer’s poor effectivity for shareholders”.
Matthew Smith, an analyst at US funding monetary establishment Stifel, was forthright in his assumptions, suggesting Jana Companions will act sooner reasonably than later sooner than shareholders can gather across the desk.
“We think about Jana will proceed to push Lamb Weston within the path of a sale ahead of the proxy course of,” Smith wrote in a evaluation phrase, referring to the director nominations window from 29 Might to twenty-eight June ahead of subsequent yr’s AGM.
Smith added: “We aren’t surprised by activist involvement given the volatility in shares, valuation contraction and agency missteps as a result of the enterprise works through a interval of over-supply.
“Valuation stands successfully below historic ranges, reflecting softer away-from-home website guests developments and pricing concerns as a result of the enterprise contends with additional functionality.”
Potential patrons
If Lamb Weston is to complete up on the for-sale market, could McCain Meals or Simplot be potential suitors? That’s nonetheless to be seen, if such a state of affairs unfolds, nevertheless Smith suggests the company may fall into “private” fingers.
“We do not think about large-cap meals firms are in all probability patrons nevertheless think about LW would revenue from a private purchaser given the positioning guests and functionality challenges over the near time interval,” he wrote.
Product sales and amount pressures have been as soon as extra evident in Lamb Weston’s fiscal 2025 first-quarter outcomes, which accompanied the plant-closure announcement, and the quantity decline was additional pronounced in North America, its largest market.
Group product sales dropped 1% to $1.7bn. Volumes fell 3% as a consequence of purchaser losses and the “clean” restaurant website guests, with a constructive worth/mix of two%.
North America product sales decreased 3% to $1.1bn, accompanied by a 4% amount decline and worth/combination of 1%.
Robert Moskow, a meals and beverage analyst at US funding monetary establishment TD Cowen, alluded to the rivals dynamics in a follow-up phrase.
“Lamb Weston’s better-than-expected pricing in 1Q signifies that opponents are often not feeling the similar functionality utilisation points as LW and do not actually really feel the need to attenuate prices to aggressively compete for purchasers that LW should regain/retain following their calendar 1Q-24 ERP execution misstep.
“In addition to, LW’s plant closure/idling improves {our capability} utilisation model to 89% by 2027.”
Moskow, within the meantime, instructed restaurant outings may be poised to pick out up, painting a brighter outlook for Lamb Weston into the model new calendar yr.
“Whereas really not good, purchaser foot website guests at QSR has stabilised at a -2% price of decline, as compared with closing yr, due largely to price meal selections. Key purchaser McDonald’s has spoken to raised developments,” he acknowledged.
“The lower interest-rate setting and getting earlier the 2024 US election uncertainty suggests a larger demand backdrop for subsequent yr.”
Requested to share his views on whether or not or not Jana Companions will push for a sale of Lamb Weston or a change of administration, Moskow declined to supply notion previous the suggestions made in his evaluation phrase.
Jana “nominees”
Tom Werner has headed up Lamb Weston as president and CEO since November 2016, when the company emerged as a spin-off from what was then ConAgra Meals. He is moreover a board member.
Jana Companions’ nominees embody Bradley Alford, Diane Dietz, John Gainor Jr., Timothy McLevish, and Joseph Scalzo.
Scalzo is the ex-CEO of The Merely Good Meals Agency, whereas Alford was a former chief of Nestlé’s US division. Dietz has served as a board member at various US firms and was as quickly as an authorities at Safeway.
Gainor’s earlier board seats embody that of TreeHouse Meals and he was as quickly because the CEO of the Worldwide Dairy Queen fast-food chain. McLevish is a managing affiliate at Strategic Advisory Companions and was authorities chair of Lamb Weston from 2016-17. He is moreover a former CFO of Kraft Meals.
Continental Grain’s involvement
One different pink flag was raised suggesting that Jana Companions might pursue, and press for, a sale of Lamb Weston – a partnership with agri-food company and investor Continental Grain Co. (ContiGroup).
A simultaneous submitting with the SEC closing Friday, cross-referenced with Jana Companions’ private submitting, confirmed Continental Grain paid $24m to build up shares in Lamb Weston amounting to decrease than a 1% stake.
Continental Grain has an funding curiosity in Restaurant Producers Worldwide, which owns the Burger King, Popeyes, Tim Hortons and Firehouse Subs consuming locations and fast-food chains.
And in 2021, Continental Grain joined forces with US agri-food huge Cargill to buy hen processor Sanderson Farms for $4.5bn – a company merged with Continental Grain’s portfolio enterprise Wayne Farms and now shopping for and promoting as Wayne-Sanderson Farms.
“ContiGroup’s involvement presents an fascinating twist given their worthwhile monitor report throughout the agri-business space as an operator (partnering with Cargill to build up Sanderson Farms) and as an investor (soybean processor Bunge),” Moskow seen.
“At a minimal, it heightens LW administration’s sense of urgency to boost their lacklustre effectivity.”
Smith at Stifel was equally intrigued.
“We uncover the Continental Grain angle fascinating. The enterprise would match correctly in Continental’s portfolio nevertheless we do not think about the company would need companions to build up Lamb Weston outright,” Smith acknowledged.
He outlined his valuation thesis throughout the context of every Lamb Weston’s newest struggles and the challenges the frozen-potato merchandise sector in North America is in the intervening time going via.
“Shares traded near 9 situations EBITDA using our FY-26 estimates earlier to the activist info, successfully below LW’s historic valuation range near spherical 13 situations.
“We think about sincere value in a take-out will be throughout the $90 range, or 11.5 situations EBITDA, closing the outlet to the packaged meals group nevertheless nonetheless a discount, reflecting this period of softer restaurant website guests and medium-term additional functionality concerns for the enterprise.”
Jana Companions wrapped up its intentions, referring to the nominees as ‘reporting people’, all through the framework of the multi-advocacy plan set forth in its SEC submitting.
“The reporting people intend to talk with the issuer’s administration and board [Lamb Weston] about, and can enter into negotiations and agreements with them regarding the foregoing, and speak with totally different shareholders or totally different third occasions regarding the issuer.
“The reporting people could take totally different steps to increase stockholder value, along with pursue totally different plans or proposals that relate to, or would finish in, any of the problems set forth.”
