ConAgra Foods Thursday said it would sell its commodity trading and merchandising operations in a deal valued at $2.1 billion, allowing it to focus on its core food business and to repurchase shares.
The company also reported much higher-than-expected quarterly profit, as results from that trading business and the company's food and ingredients segment helped offset falling profit at the company's largest unit, consumer foods, which has been hurt by soaring commodity costs.
The company also raised its fiscal 2008 earnings forecast.
Shares of ConAgra , whose brands include Healthy Choice meals and Chef Boyardee pasta, were up more than 6 percent on the New York Stock Exchange.
ConAgra agreed to sell the trading and merchandising business to the Ospraie Special Opportunities fund, an affiliate of investment management firm Ospraie Management, which is focused on commodities and basic industries. The acquired business will be renamed Gavilon.
ConAgra will receive $1.6 billion in cash, subject to working capital fluctuations, and $525 million in payment-in-kind securities of a newly created Gavilon holding company, ConAgra said.
The commodity trading and merchandising business, a vestige of ConAgra's roots as more of a commodity based company, has helped support ConAgra's profits for several quarters while other parts of the business have suffered.
Right Time to Sell?
But the commodity trading business can be more volatile over the long term than a packaged foods business and ConAgra decided to sell the business during a time when commodity trading was strong.
The company also has typically not received any credit in the stock market from strength in the trading business, analysts said.
"This is a way for them to at least sell the business while it is seeing strength," Matt Arnold, analyst at Edward Jones, said. "Meanwhile, it does sharpen their focus on the area that does matter long-term, branded food."
The fiscal third quarter ended Feb. 24 was an example of how the trading and merchandising business helped support profits.
ConAgra posted profit of $309.1 million, or 63 cents a share, in the fiscal third quarter ended Feb. 24, compared with $192.6 million, or 38 cents, a year earlier.
Analysts had forecast 41 cents a share, according to Reuters Estimates,
Trading and merchandising segment profit more than tripled, and profit from ConAgra's food and ingredients business rose by 33 percent. Meanwhile, profit from the consumer foods business, which makes up more than half of the company's sales, fell 8 percent due to higher costs, even as sales rose 8 percent.
"The area investors probably want to see the strength from in the long term is the core consumer foods business, and numbers there weren't very impressive," Arnold said.
Overall, sales rose 20.9 percent to $3.53 billion, ConAgra said.
ConAgra also forecast full-year 2008 earnings of $1.80 to $1.85 a share, excluding one-time items. The company in December forecast earnings slightly above $1.55 a share.
For 2009, ConAgra said it currently expects earnings of at least $1.55 a share, excluding one-time items. That forecast assumes no contribution from the trading and merchandising business.