Hedge fund acquiring ConAgra trading unit

by Josh Sosland
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NEW YORK — Ospraie Management L.L.C., a New York-based investment management firm and ConAgra Foods, Inc., have reached an agreement under which an investor group led by Ospraie Special Opportunities Fund will acquire for about $2.1 billion the trading and merchandising operation conducted by the ConAgra’s Trade Group. Included will be the unit’s grain storage and handling assets.

The Trade Group will be renamed Gavilon L.L.C. upon completion of the sale. Ospraie Management, established in 1999, currently has $9 billion under management in investments focused solely on commodities and basic industries. Greg Heckman, president of the ConAgra Foods commercial businesses, will become chief executive officer of Gavilon upon closing.

For Omaha-based ConAgra, the transaction represents a major infusion of cash, which the company said would be used principally for share repurchase (the purchase price equates to about 20% of the company’s March 26 market value). Additionally, the sale will increase ConAgra’s focus on the packaged foods business and away from its heritage grain trading and milling business. The company’s milling operations, one of the largest in the United States, are not included in the transaction.

In exchange for selling the Trade Group, also know as its Trading and Merchandising segment, ConAgra will receive $1.6 billion in cash, subject to fluctuations in the unit’s working capital. ConAgra also will receive $252 million of payment-in-kind debt securities to be issued by a newly created Gavilon holding company.

Additionally, ConAgra will receive a contingent right for a portion of Gavilon profits earned during the balance of calendar 2008 and also will acquire warrants allowing the company to acquire up to 8% of the purchaser of the trading business.

According to ConAgra, Gavilon will remain in its current Omaha offices after the transaction closes and will retain "virtually all of the approximately 950 employees of ConAgra Trade Group."

The agreement includes 144 facilities, located principally in North America. According to the 2008 Grain and Milling Annual published by Milling & Baking News (sister magazine to Food Business News), the Peavey Grain business of ConAgra is the sixth largest grain company in the United States. ConAgra owns addition grain storage capacity through its flour milling business. Assets in the Peavey unit, to be sold as part of the transaction, include 64 grain elevators with grain storage capacity totaling 121,564,000 bus.

In addition to grain and byproducts trading and merchandising, the transaction will include fertilizer distribution and other agriculture and commodity as well as energy trading activities and risk management services.

"We are excited to acquire this dynamic business and look forward to working with Gavilon’s talented team to build on the success of its agricultural, energy and fertilizer commodities distribution, merchandising and trading," said John Duryea, portfolio manager of the Ospraie Special Opportunities fund. "As a stand-alone entity, Gavilon will continue to provide its clients with the most innovative solutions. Through enhanced resource allocation and by pursuing incremental opportunities, Ospraie intends to further grow the business."

For Gary Rodkin, ConAgra’s c.e.o., the transaction offers the company an opportunity to avoid the ups and downs inherent in a commodity trading business.

"Given our existing and ongoing emphasis on our core strategic food platforms, along with the strength of the commodities cycle, we believe this is an excellent time to exit this business," Mr. Rodkin said. "The sale gives us a unique opportunity to redeploy capital, largely toward share repurchases. The benefit of capital redeployment, along with the ongoing growth initiatives in our core food businesses, are expected to improve the quality and sustainability of our earnings results."

Another benefit of the transaction cited by ConAgra is an anticipated reduction and increased predictability in its working capital requirements. By contrast, such requirements have been large and volatile for the ConAgra Trade Group.

ConAgra said it would retain certain trading and merchandising personnel "dedicated to buying key commodities used in ConAgra Foods’ products." This group will become part of the company’s enterprise procurement function.

In addition to share repurchases, ConAgra said it would use proceeds from the transaction for debt reduction. Ospraie said it has received financing commitments from a bank lending group totaling $1.5 billion.

Centerview Partners L.L.C. served as primary financial adviser to ConAgra Foods and provided a fairness opinion on the transaction. Credit Suisse was financial adviser of Ospraie.

Subject to customary conditions, the companies hope the transaction will close within 60 days.

Elaborating on the transaction, ConAgra said the purchase price of $2.1 billion equates to the acquired business’ book value plus $600 million. The warrant ConAgra will receive will have an exercise price of 200% of the buyer’s initial equity value. The earnout provision equates to 50% of profits above $36 million per quarter (pro-rated for any partial period). Subject to a cap, ConAgra said the total earnout is not expected to exceed $60 million.

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