A deal price could not be immediately obtained, but it will be financed partially in cash and partially in stock, the sources said.
Shares of Pinnacle were up 2.51 percent on CNBC's report, giving it a market capitalization of $8.10 billion, while shares of Conagra were down 0.49 percent, giving it a market capitalization $15.25 billion.
The sources, who requested anonymity because the information is confidential, cautioned that a deal could still fall apart. Conagra and Pinnacle both declined to comment, citing policies against discussing market speculation.
A pairing of Healthy Choice-owner Conagra and Bird's Eye-owner Pinnacle would combine two companies with a large presence in frozen foods at a time when the category is seeing a resurgence. It would create the second-largest U.S. frozen food company behind Nestle, analysts at RBC Capital Markets have written.
It would also be the culmination of on-again, off-again talks the two have had for years. It comes months after activist investor Jana Partners disclosed a roughly 9 percent stake in Pinnacle and said it planned to talk with the company about a possible sale.
Jana has a track record with the pairing, having previously taken a stake in and pushed for changes at Conagra.
Meantime, Conagra CEO Sean Connolly brings to the deal his own track record. Connolly was CEO of Hillshire Brands when it attempted to buy Pinnacle in 2014. Hillshire, though, ultimately scrapped that deal in favor of a sale to Tyson Foods.
Since becoming CEO of Conagra in 2015, Connolly has drastically transformed the company to focus on modernizing a portfolio of branded foods that includes names like Orville Redenbacher's popcorn and Hebrew National hot dogs. It has put money toward its frozen foods business, as millennials have rediscovered the cost and health benefits of eating frozen.
In the process, it has both shed and added to its portfolio. It sold its private-label unit for $2.7 billion in 2016 and later that year spun off its $6.9 billion potato business, Lamb Weston Holdings. It has bought up a number of smaller snack brands, including Angie's Artisan Treats, the parent of Boomchickapop, and Thanasi Foods, the parent of Duke's meat snacks.
Conagra's CEO recently told analysts that "M&A remains a central part of [the company's] plan," and that Conagra intends to pursue a range of deals including, "modernizing acquisitions, synergistic acquisitions and select divestitures."
Pinnacle, meantime, has undergone its own changes. It acquired Boulder Brands, owner of gluten-free foods and snacks like Udi's and Glutino, for roughly $975 million in 2016.
Still, Pinnacle is seeing its strongest growth in its frozen food business, which is the company's largest. Last quarter, it grew at a rate of 7.5 percent. Its Boulder business grew 0.5 percent and its grocery business, which includes brands like Vlasic pickles, Duncan Hines cake mix and Wish-Bone salad dressing grew 0.6 percent. The latter has been squeezed as consumers eye healthier, cheaper or newer alternatives.
While big food companies across the board have seen sales stall as they struggle with the burden of having large brands out of touch with today's shoppers, frozen food has been one of few the categories they have been able to revive through investment. It is a category that benefits particularly from scale.
It has also, therefore, been a center of M&A activity. Schwan's Co., maker of frozen foods like Tony's pizza, hired a bank last year to weigh a sale, CNBC then reported. Nomad Foods earlier this month announced its plans to acquire U.K. frozen potato and pudding company Aunt Bessie's. The company has swooped up a number of frozen food brands over the past few years, including Findus and Iglo.