Buyout Watch: Pinnacle Foods

This consumer packaged goods company looks ripe for the taking

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Feb 28, 2018
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Wall Street is always rife with speculation over mergers and acquisitions. A takeover bid, or even the threat of one, can send the sleepiest stock soaring. Today, we look at a stock that could well see some M&A action in 2018: Pinnacle Foods (PF, Financial).

Pinnacle Foods deals in frozen foods and long shelf-life packaged foods, beverages and condiments. It is an interesting company in its own right and worthy of consideration by investors with knowledge of the consumer packaged goods sector. But the potential for significant buyout upside makes it even more enticing.

Let’s take a look at Pinnacle Foods and the near-term gains a buyout could bring investors.

A brief introduction to Pinnacle Foods

Pinnacle Foods owns a broad range of brands that have come to be established household names. In its grocery segment, well-known brands range from Mrs. Butterworth’s maple syrup to Wish-Bone dog treats. Within its frozen foods segment can be found Hungry-Man frozen dinners, as well as the whole Birds Eye range of frozen foods.

Financials are decent

The company has posted decent financial results. It has seen substantial growth over the past few years, and its reported results in 2017 were largely in line with analysts’ expectations. Analysts are generally bullish, with an average price target of $66. Taking the closing price on Feb. 27, $55.23 a share, we can see anticipated upside of about 19.5%. With a market capitalization of $6.6 billion, Pinnacle Foods is far from a minnow. But it is still small enough to make an enticing takeover target for larger industry players.

Activist already circling

Pinnacle Foods garnered an uptick in interest in January 2018 when it was revealed that Third Point LLC, a hedge fund led by veteran activist investor Dan Loeb, had begun building a stake in the company. Speculation immediately began to mount that Loeb would push to put Pinnacle Foods up for sale and to broker a deal that would create short-term value enhancement for shareholders. That certainly fits with Third Point’s past actions.

Analysts anticipating buyout action

The news sent shares upward immediately. The upward run was further galvanized in late January by analyst commentary from Stephens Inc., which opined that Pinnacle Foods could garner significant interest from industry giants such as ConAgra (CAG, Financial) or Tyson Foods (TSN, Financial). Stephens suggested that a buyout might see a price tag as high as $85 a share – that is some major upside!

One suitor demurs …

Shares rose on the prospect of an imminent takeover, and they have since fallen back thanks to one likely suitor’s opting not to make a move. According to a JPMorgan analyst, Tyson Foods has no intention of making an offer should Pinnacle Foods put itself up for sale: “Many investors have been asking lately if TSN, which has said it wants to do more deals, would look at PF; the answer seems to be no.” Unsurprisingly, that news sent stocks tumbling a bit.

… But there are other fish in the sea

While Tyson has opted out of making a play for Pinnacle Foods, it is far from the only potential dancing partner. ConAgra is one that might make a move, since its offerings would be supplemented quite nicely by Pinnacle’s brands. If the company is ultimately pushed to seek a buyer, it should be able to find a deal. As for buyout price to expect, investors should be looking for offers closer to $70 a share. A higher price is possible, of course, but not terribly likely – it would probably take a bidding war between two or more interested companies to see a price of $85 a share. Still, $70 represents considerable upside over the current share price.

Verdict

While not radically exciting on its own, Pinnacle Foods presents an interesting investment profile. It has traded down a bit lately, which could work in new investors’ favor by presenting a few more points of upside potential. Interested investors should look closely at the company’s fourth-quarter 2017 earnings report and commentary, which is scheduled for release on March 1. For investors interested in relatively solid plays, with the potential for a takeover-derived windfall, this company might merit a closer look.

Disclosure: I/We own none of the stocks discussed in this article.