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How Did ConAgra Foods Use the Proceeds from Its Divestiture?

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Utilization of sale proceeds

ConAgra Foods (CAG) completed the divestiture of its private-label business on February 1, 2016. The company received proceeds of more than $2.6 billion and used $2.2 billion of the proceeds from the sale to reduce its long-term debt. The sale also provided a sizable tax benefit, which the company plans to use in the future. CAG plans to further reduce debt through its balanced capital allocation program. It also plans to use the majority of the remaining proceeds for debt repayment over the next several months.

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Effect of discontinued operations

The private-label operations affected CAG’s EPS (earnings per share) for two months in fiscal 3Q16 before the completion of the divestiture on February 1. This discontinued business reported earnings of $0.05 per diluted share during the quarter. It posted $0.11 per share after adjusting for items impacting comparability, which included a benefit of ~$0.05 per share related to the elimination of depreciation and amortization expenses. Expected comparable earnings from the private-label operations were included in the earlier guidance for the quarter provided by the company.

The new outlook for 2016

The divestiture of the ConAgra Foods’ private-label business is now classified within discontinued operations in current and prior periods. The company adjusted its fiscal 2016 diluted EPS (earnings per share) guidance in accordance with the expectations for comparable results for continuing operations. So far in fiscal 2016, CAG has reported diluted EPS from continuing operations of ~$1.16. Adjustment for items impacting comparability brings that figure to $1.56. In fiscal 2016, diluted EPS from continuing operations, adjusted for items impacting comparability, are estimated to be in the range of $2.05–$2.07.

The company expects its fiscal 4Q16 comparable EPS will be ~$0.50, allowing the company to reach its guidance for fiscal 2016. The guidance reflects continued strong fundamentals in the Consumer Foods and Commercial Foods segments. The new guidance is lower than the previous year’s EPS of $0.55. This figure mainly reflects the extra week last year, the impact of currency translation, higher marketing investments, and higher incentives.

On a YTD (year-to-date) basis, ConAgra Foods’ peers McCormick & Company (MKC), Mead Johnson Nutrition Company (MJN), and WhiteWave Foods (WWAV) have reported returns of 15.2%, 6.9%, and -0.31%, respectively. The iShares Global Consumer Staples ETF (KXI) invests 0.62% of its portfolio in MJN.

In the next part of this series, we’ll look at how much ConAgra Foods returned to shareholders in fiscal 3Q16. We’ll also look at the company’s upcoming dividend.

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