(Bloomberg) -- The pressure is on for Conagra Brands Inc. to prove that a recent rebound in frozen food can last.
Its $8.1 billion cash and stock deal to buy Pinnacle Foods Inc. isn’t sitting well with investors, who drove the food giant’s shares down the most in 1 1/2 years on Wednesday. Some may see the accord as too expensive even as it bolsters Conagra’s footprint in the freezer-aisle with brands such as Birds Eye. Another concern: the company’s plan to issue shares to help pay for the acquisition.
“Shareholders don’t like to get diluted and paying with stock is an admission that your stock price is rich,” said Michael Halen, an analyst at Bloomberg Intelligence. “It’s a pricey deal, but it makes a whole lot of sense.”
The deal values Pinnacle at $68 a share, the companies said in a statement Wednesday. The price is 23 percent above Pinnacle’s closing level on April 19, when an activist investor disclosed a stake in the Parsippany, New Jersey-based company and began pushing it to sell itself. Bloomberg News reported last week that Conagra had approached Pinnacle about a deal. Including assumed debt, the deal values Pinnacle at about $10.9 billion.
Conagra shares tumbled as much as 7.5 percent to $35.37 in New York, the biggest intraday slide since November 2016. Pinnacle fell as much as 4.3 percent to $64.94, the most in about three months. Its shares had soared since early April, lifted by takeover speculation.
Sean Connolly, Conagra’s chief executive officer, said he couldn’t speculate on the stock’s decline, though he defended the deal.
“These portfolios fit perfectly together,” he said on a conference call. Pinnacle’s brands have “real legitimate growth potential,” he said.
The purchase will give Chicago-based Conagra more exposure to one of the few bright spots in the grocery store: Frozen food sales are growing after years of decline. Even millennials, known for their foodie tastes, are embracing frozen meals, which are convenient and less expensive than takeout. More than half of Pinnacle’s revenue comes from frozen brands including Birds Eye, Van de Kamp’s and the Gardein line of vegetarian products.
The pressure on packaged-food makers to get bigger has intensified in the aftermath of Whole Foods Market Inc.’s sale last year to Amazon.com Inc. Frozen food, however, is considered relatively resistant to Amazon’s push to get shoppers to buy more groceries online because they’re tricky to deliver.
Conagra’s quarterly results, also posted on Wednesday, showed why the company is doubling down on frozen food with the Pinnacle deal. Conagra’s refrigerated and frozen segment, with brands like Banquet and Healthy Choice, was the fastest-growing.
“The long-awaited deal finally comes together,” Stifel analyst Christopher Growe, who advises buying Conagra’s stock, wrote in a note. “The nearly $11 billion acquisition creates a powerhouse in the frozen food aisle.”
Growe added it was “a bit surprising” that the multiple for the deal was lower than recent acquisitions in the food industry and the $68-a-share price came below his expectation of $75.
Activist fund Jana Partners urged Pinnacle to explore a sale after reporting a 9.5 percent stake in the packaged food maker in April. The New York-based hedge fund, run by Barry Rosenstein, said in a filing then that it thought the company was in a good position to consider consolidation given its strength in the frozen foods industry.
Jana also has history with Conagra, which in 2015 agreed to add two directors to its board in a settlement with the fund. It currently owns a stake in Conagra of less than 1 percent, according to data compiled by Bloomberg. Conagra’s brands also include Marie Callender’s and P.F. Chang’s Home Menu.
Goldman Sachs and Centerview Partners advised Conagra, with Jones Day as legal adviser. Bankers from Evercore and Credit Suisse worked for Pinnacle along with law firm Cravath Swaine & Moore LLP. Morgan Stanley and Rothschild & Co. provided strategic advice to Pinnacle.
Pinnacle holders will receive $43.11 in cash and 0.6494 of a Conagra share for each of their shares. The implied price of $68 is based on the average price for Conagra in the five days ended June 21.
Conagra forecast profit for the current quarter of 46 cents to 49 cents a share, excluding some items. That missed the 55-cent average of analysts’ estimates. For the three-month period that ended May 27, net sales climbed 5.6 percent to $1.97 billion, compared with the average analyst estimate of $1.93 billion. Adjusted earnings from continuing operations totaled 50 cents, beating the average estimate of 44 cents.
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