ConAgra Foods Inc. said it plans to shed part of itself for the second time this year, extending Chief Executive Sean Connolly’s transformation of the company by spinning off a line of frozen-potato products with nearly $3 billion in annual sales.
The split of Lamb Weston will rid ConAgra of most of its existing business selling foods to restaurants and other commercial customers, leaving it to focus on its dozens of grocery-store brands, which include Peter Pan peanut butter, PAM cooking spray, Hebrew National hot dogs and Gulden’s mustard.
Mr. Connolly said the move will enable both the remaining business, to be called Conagra Brands, and Lamb Weston both to better focus and generate stronger growth. “Clearly, as a company, we’ve had a lot of different things going on and competing for management’s attention,” he said on a conference call. “By creating two pure-play companies, we are best positioning each to compete.”
Investors cheered the move, which wasn’t expected, sending shares up 4% to $40.93 on Wednesday.
In just over seven months, Mr. Connolly has reshaped ConAgra, which traces its roots to the 1860s, from an unwieldy food conglomerate with more than $15 billion in annual revenue last year to one that, with the newly announced spinoff, would have had just $9 billion but is more focused and more profitable.
Earlier this month, ConAgra agreed to sell its struggling private-label business—which makes foods for supermarkets’ in-house brands—to Treehouse Foods Inc. for $2.7 billion—less than three years after ConAgra acquired it. In October, it disclosed a plan to cut $300 million in annual costs that included 1,500 layoffs, and said it would move its headquarters to downtown Chicago from Omaha, Neb.
Connolly has also brought in a new senior executive to streamline the company’s supply chain.
ConAgra’s consumer-foods business, which will form the bulk of the new brands company, had operating-profit margins of 14.6% in its last fiscal year, compared with 12.7% for the commercial-foods business, which was mainly Lamb Weston.
ConAgra expects to complete the spinoff of Lamb Weston, which will be based in the Pacific Northwest, by late 2016, after which shareholders of ConAgra will own stock in both new companies.
Some analysts suggested Lamb Weston could be acquired soon after spinning off from ConAgra, providing additional upside for shareholders.
There is a downside to the split—losing the shared back-end resources and other synergies of a combined business. Mr. Connolly said in an interview that they will have to fill some holes after the spinoff, but that the expected improvement in profit margins for both will offset those costs.
Meanwhile, the leaner Conagra Brands will be able to pursue more acquisitions, and to better address the changing eating habits of Americans by making brands like Hunt’s tomato sauce and Reddi-wip dessert topping more relevant, Mr. Connolly said.
Some analysts suggested Pinnacle Foods Inc. would fit with ConAgra’s consumer brands since they both make frozen foods. Mr. Connolly tried to acquire Pinnacle last year when he was CEO of Hillshire Brands Co., before Hillshire was sold to Tyson Foods Inc.
“The creation of a stand-alone consumer brand business would seem to leave that business free to pursue a wide number of M&A options,” like Pinnacle Foods, said RBC Capital Markets analyst David Palmer.
But Don Bilson, an analyst at financial-services firm Gordon Haskett, said ConAgra’s “plate couldn’t be more jammed at the moment, and as a result, we don’t see it making another big move for some time.”
Mr. Connolly declined to discuss specific possible acquisitions. He said in the interview that the new Conagra Brands will focus on “clean label, natural, and organic foods, as well as premium and gourmet. That’s where we’ve got some real opportunities.” He’ll also work on refreshing older brands like Healthy Choice frozen meals.
Conagra Brands still plans to move into its new office space in Chicago and to “feel more like a startup than it does like a legacy CPG food corporation,” the CEO said.
The industry overall is tougher now, Mr. Connolly said. “We have good competitors who are also on the move, and our job is to outpace them,” he said. “We’re on a mission here to build an agile, performance-oriented culture with improved capabilities where employees are highly energized.”