Quantfury Gazette

Activist investor JANA Partners eyes Lamb Weston (NYSE: LW) as the next frozen potato it wants to turn hot

by
Nathan Crooks
Quantfury Team
lamb weston

JANA Partners—an activist investment firm founded by hedge fund manager Barry Rosenstein—is stepping up the heat on frozen potato maker Lamb Weston (NYSE: LW) and pushing for change amid a steep decline in shares. While the company has blamed its woes on declining restaurant traffic, rising costs and price-sensitive eaters, JANA thinks the biggest maker of french fries in North America can recover with a change in strategy, or ownership.

JANA has a long history of working to turn struggling food companies around, having led previous campaigns to push for change at firms like TreeHouse Foods and ConAgra Foods (NYSE: CAG). It famously turned a $300 million profit from an investment in Whole Foods that ultimately saw the upscale grocery chain sold to Amazon (NASDAQ: AMZN) after a contentious battle.

In a filing with the US Securities and Exchange Commission last week, JANA echoed the same language it had used when first describing its interest in Whole Foods: “Shares are undervalued and represent an attractive investment opportunity.” This time, the activist investor was speaking about Lamb Weston, and it said it spent $336 million to purchase a 5% stake. JANA plans to work with private grain-trading giant Continental Grain to have discussions with the potato company’s board about “the litany of self-inflicted missteps that have led to underperformance for shareholders.”

JANA said it also wants to look at operating deficiencies, capital spending, share repurchases and management compensation practices, “including adding targets focused on returns on capital to deprioritize pursuit of growth at any cost.” It highlighted past interest in Lamb Weston as an acquisition target as the reason it wants a review of strategic alternatives that could include a sale.

Lamb Weston shares had declined as much as 50% this year amid the frozen potato market slump that saw consumers pull back as inventories rose. The Idaho-based company’s competitors that trade on public markets haven’t fared as poorly despite the challenges, which suggests that JANA may be on to something. Brazilian food processing firm BRF SA (NYSE: BRFS) has seen its shares rise 62% this year, while Dole PLC (NYSE: DOLE) has gained 28%. Two of Lamb Weston’s largest competitors—J.R. Simplot Company and McCain Foods Limited—are private firms, and that might make the company attractive as a go-private target at its current depressed valuation of $11 billion. 

Lamb Weston, for its part, has already been moving to better calibrate its operations for the challenging environment and earlier this month announced a plan to close an older production facility and lay off about 4% of its global workforce. In its latest quarter, the potato producer noted a bit of a turnaround and suggested that the worst part of the downturn may be over; its shares surged 12% last week after JANA disclosed the stake it purchased. CEO Tom Werner told analysts on a conference call earlier this month that demand for frozen potatoes and global restaurant traffic would likely remain challenging for the rest of the year even as diners around the world continue to add fries to their restaurant orders. 

There’s no guarantee that JANA will be successful in its latest quest to spice things up at Lamb Weston, and it’s had misses in the past. The investment firm has had major wins with previous targets in the food sector, however, and it’s also prepared to nominate people to Lamb Weston’s board who have a myriad of connections across the industry that could be instrumental in facilitating a potential deal. Investors could be served a super-sized return if JANA’s thesis about an undervalued company holds true. But if it’s just needlessly pushing against a target that was already on the mend, there could be instead a case of overcooked fries.

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