Pinnacle Foods (PF) Rallies 10% on Hearsay of Divestiture

If market hearsays are to be believed, activist hedge fund investor Jana Capital Partners LLC has been in talks with renowned food company, Pinnacle Foods Inc.PF , for restructuring and for considering the possibility of a divestiture. In fact, sources revealed that Jana Capital has procured a 9.1% stake in Pinnacle foods.

While the latest buzz keeps the future of Pinnacle Foods under veils, investors look quite excited. Evidently, shares of this Zacks Rank #3 (Hold) company gained almost 10% on Apr 20. On that note, let's take a closer look at how the decision might impact the company.

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What to Expect from Jana Capital?

Jana Capital's big plans with Pinnacle foods includes undertaking several value creation measures such as optimizing costs, margins as well as capital allocation. These measures are likely to aid the company in offsetting heightened operating expenses, stemming from higher product introductory costs, logistics and packaging along with the anticipated input cost inflation for 2018.

Speculations also suggest that Jana Capital's supposed plans are directed toward developing firmer grounds for Pinnacle foods' merger with Conagra Brands Inc. CAG . Previously, Conagra was interested in acquiring Pinnacle Foods but talks in this regard were stalled due to disagreements between the parties. Incidentally, Jana Capital also holds investments in Conagra.

With the activist investor's involvements in the companies, talks of a merger between these food players are likely to be back on the table soon. If at all such probabilities are put to action, it would lead to the joining of two strongly performing food manufacturers, significantly raising the competition bar for other players in the industry.

Well, Jana Capital holds quite a fame for probing into the food sector and stirring up massive changes. In 2017, the company purchased stakes in Whole Foods Market and implemented several changes in its board and operations, before it got acquired by Amazon Inc. AMZN . The company initiated several changes at Bloomin' Brands, Inc. BLMN , which helped it gain a board seat in the latter.

Pinnacle Foods boasts of a strong market position, a possible factor that might have caught Jana Capital's interest in the company. Notably, with its fourth-quarter 2017 results, the company marked its 15th straight quarter and sixth consecutive year of market share growth, mainly fueled by the Duncan Hines and Birds Eye businesses.

Business Fundamentals Boost Investors' Optimism

Incidentally, Pinnacle Foods has been bolstering its market share and products-line through well-chalked acquisitions. In fact, during 2017, the company gained synergies of $16 million from the Boulder Brands acquisition. Other than this, the acquisitions of Duncan Hines manufacturing business and Garden Protein have also yielded favorably.

Courtesy of such efforts, combined with acquisition synergies, constant innovations and benefits from the network optimization program, the company expects productivity for 2018 to be 4-4.5% of costs of products sold. Further, it expects results to be stronger and anticipates gross margin improvement of 300-400 basis points (bps) by 2020.

Indeed, such constant growth endeavors combined with a positive outlook for 2018 has been fueling investors' optimism in the stock. Well, the stock has gained 9.1% in the past six months, while the industry declined 7.8%.

Moreover, we expect that if the rumored plans with Jana Capital materialize, it will undoubtedly add to the strength of Pinnacle Foods in the industry. On that note, let's wait and see in which direction the company moves in the forthcoming periods and whether such bold moves will drive its stock higher.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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