Generic products, private brands
Key product categories in ConAgra’s Private Brands business include snacks, pasta, and bakery items.

OAK BROOK, ILL. – The benefits of TreeHouse Foods’ proposed acquisition of ConAgra Foods’ Private Brands business will take time to manifest. The structure of the deal may be described as a “carve out,” which means TreeHouse is buying a business that does not include many of the functional support capabilities, such as I.T., that normally would be part of a standalone company. As such, TreeHouse management expects the transition to take as long as two years to complete and does not expect to see any earnings accretion until year two.

In year one, the company expects to experience earnings dilution in the range of 20c-35c in adjusted earnings per share during 2016. Earnings accretion in the range of 55c-70c per share is expected in year two. The company expects the process of transferring multiple systems from ConAgra to TreeHouse to take up to two years. The company said it also will incur overhead costs as it adds employees to take on such corporate responsibilities as treasury, tax, legal and human resources.

Dennis Riordan
Dennis Riordan, TreeHouse’s c.f.o.

“If we can be successful in quickly restoring customer satisfaction through improved customer service, quality, and product innovation, and realize the benefits of implementing our cost management strategies throughout the supply chain, we could see significantly better accretion by year three. However, it's too soon to commit to higher numbers,” said Dennis Riordan, TreeHouse’s chief financial officer, in a conference call with financial analysts on Nov. 2 to discuss the transaction.

TreeHouse announced that day it had entered into an agreement with ConAgra Foods to acquire most of ConAgra’s Private Brands business for approximately $2.7 billion. For that price, TreeHouse is acquiring a business that may be described as going backwards since ConAgra acquired it from Ralcorp Holdings in 2013 for approximately $6.8 billion.

“So, what we see here is a business that we think is starting to hit the bottom, and we think that we've got the opportunity to come in and help get the directions set in private label to see the improvements that we think they're capable of, and begin to get the restoration of that business,” Mr. Riordan said. “The point though, when I gave the guidance and why it was a little light, at least to start, is you have to remember that in private label, we're generally working with nine-month, 12-month product lifecycle. So we can come in, we can redirect, we can really put some emphasis on service and new products and innovation and reformulations, but the reality is, it's a year before it starts to manifest and two years before it really starts to take off.”

Sam K. Reed, chairman, president and chief executive officer of TreeHouse Foods, said one of the issues ConAgra ran into as it attempted to combine its branded and private brands business was the ability to fill orders and get product into stores.

Sam Reed, TreeHouse Foods
Sam K. Reed, chairman, president and c.e.o. of TreeHouse Foods

“That is really the essence of the issue that has plagued this business, and we have begun to see once the Private Brands team was established in late June, that there's been a substantial improvement in that regard,” he said. “So that's the fundamental issue that you have to deal with here.”

Key product categories in ConAgra’s Private Brands business include snacks (which had $1.3 billion in annual sales, according to TreeHouse Foods), bakery ($650 million), pasta ($500 million), cereal ($450 million), bars ($400 million) and condiments ($250 million).

By comparison, in fiscal 2014, ended Dec. 31, 2014, TreeHouse Foods’ largest product category was beverages, with approximately $500 million in sales. Salad dressings ($362 million), beverage enhancers ($359 million), soup and infant feeding ($351 million), and pickles ($303 million) rounded out the company’s top five product categories. TreeHouse Foods also generated approximately $287 million in sales of snacks and $169 million in cereal sales.

“You can see from the categories that we will be adding a lot of new business in our key strength of shelf stable food categories, and we see synergy opportunities in complementary category like condiments, snacks, and bars,” Mr. Riordan said.

Mr. Riordan will act as interim president and chief operating officer of the new business and lead the integration process. He also will maintain his role as c.f.o. In addition, Kevin Hunt, the former c.e.o. of Ralcorp Holdings, will act as a senior advisor to Mr. Riordan during the integration process.

Once combined, TreeHouse Foods will have approximately $7 billion in sales, employ more than 16,000 and operate more than 50 manufacturing plants.

“Our acquisition of ConAgra’s Private Brands will not only mark our ten-fold sales growth, approaching $7 billion, but also our transformation from a brash upstart to the industry leader in private label foods,” Mr. Reed said. “From modest beginnings, we have pursued a strategic course of expansion that has not only enlarged our TreeHouse, but also enhanced its competitive advantage and extended its capability across a broad and diverse portfolio. That strategic course will soon lead us to doubling our go-to-market reach and in doing so, expand our presence with grocery and food service customers and their consumers.”

In fiscal 2014, TreeHouse Foods generated $2.9 billion in sales. A spin-off from Dean Foods in 2005, TreeHouse has been aggressive in making acquisitions and growing during the past 10 years. Notable acquisitions included E.D. Smith, a salad dressing and condiment manufacturer, in 2007; Sturm Foods, a processor of hot cereals and powdered drink mixes in 2010; and Flagstone Foods, a snack nut and trail mix processor, in 2014.

“While synergies and economies of scale will drive our financial performance, our strategic rationale for acquiring what is substantially the former Ralcorp, is based upon an extraordinary opportunity to extend the TreeHouse brand of innovation, service, and partnership to an expanded product portfolio across the retail grocery trade,” Mr. Reed said. “Customer brands, once measured by their transactional value, are now valued as strategic levers to gain consumer preference and sustain shopper loyalty. Our proven commitment to building store brands of exceptional quality, variety, convenience and value without compromise provides an ideal vehicle for our grocery customers to realize the full strategic potential of their own brands.”