ConAgra Foods Inc. said March 27 that it has reached an agreement to sell its commodity trading and merchandising operations conducted by ConAgra Trade Group to the Ospraie Special Opportunities fund (Ospraie) and other investors for approximately $2.1 billion, subject to certain adjustments. Ospraie is an affiliate of Ospraie Management, a leading investment management firm focused exclusively on commodities and basic industries, with approximately $9 billion under management. ConAgra Trade Group will be renamed Gavilon LLC upon completion of the sale.
ConAgra Foods will sell the operations of ConAgra Trade Group, its biggest money maker, also known as the Trading and Merchandising segment, in exchange for approximately $1.6 billion in cash, subject to working capital fluctuations, and $525 million (face value) of payment-in-kind debt securities of a newly created Gavilon holding company. The weighted average interest rate on the debt securities is 10.82 percent. The final purchase price will be adjusted based on working capital changes subsequent to Feb. 24, 2008. In addition, ConAgra Foods will receive a contingent right to a portion of future earnings during the remainder of calendar 2008 and a warrant exercisable for 8 percent of the equity of the purchaser. Key terms of the warrant include a four-year term, exercise price of 200 percent of the business purchaser’s initial equity value, and applicability of normal anti-dilution adjustments. From closing through December 21, 2008, ConAgra is entitled to receive additional amounts equal to 50 percent of Gavilon’s profits before tax in excess of $36 million per quarter (pro-rated for partial periods). The earnout is subject to an overall cap. Because pre-closing profits before tax are considered against the cap, ConAgra does not anticipate the total earnout to exceed approximately $50 million. Earnout amounts may be paid in additional three-year pay-in-kind notes with an interest rate of 10.75 percent.
Greg Heckman, president of the ConAgra Foods commercial businesses, will become chief executive of Gavilon upon close of the transaction, which is expected within 60 days, subject to satisfaction of customary closing conditions, including normal regulatory approvals. Gavilon will remain in its current offices in Omaha, Neb. Virtually all of the approximately 950 employees of ConAgra Trade Group will become employees of Gavilon. The agreement includes 144 facilities, located primarily in North America. Gavilon will conduct grain and byproducts merchandising and fertilizer distribution, as well as agriculture, energy and other commodity trading activities, and risk management services.
ConAgra veteran Brian Harlander will remain at the helm of the fertilizer unit, which has some 67 terminals across the U.S. Customers were assured it would be business as usual under the new ownership, with the goal of making the transition as seamless as possible.
“Given our existing and ongoing emphasis on our core strategic food platforms, along with the strength of the commodities cycle, we believe this is an excellent time to exit this business,” said Gary Rodkin, ConAgra CEO. “The sale gives us a unique opportunity to redeploy capital, largely toward share repurchases. The benefit of capital redeployment, along with the ongoing growth initiatives in our core food businesses, are expected to improve the quality and sustainability of our earnings results.”
ConAgra said investors had been wanting the company to focus on its core food group. By selling CTG, ConAgra will fit more with its peer group of food companies and not have the added volatility and risk associated with the trading arm.
“While profits from the Trading and Merchandising operations have been extremely high over the past four quarters, due to unprecedented volatility in commodities markets, our sole focus is on more repeatable earnings and cash flow growth from our core food operations,” said Rodkin. He said the sale will allow a new buyer to fully optimize the CTG unit.
“We are excited to acquire this dynamic business and look forward to working with Gavilon’s talented team to build on the success of its agricultural, energy and fertilizer commodities distribution, merchandising and trading,” said John Duryea, Ospraie portfolio manager. “As a stand-alone entity, Gavilon will continue to provide its clients with the most innovative solutions. Through enhanced resource allocation and by pursuing incremental opportunities, Ospraie intends to further grow the business.”
ConAgra said the deal would not change its long-term EPS annual growth expectations of 8-10 percent, excluding items impacting comparability. Despite forgoing operating income from the T&M segment following the sale, the company expects share repurchases and interest income related to the transaction, along with expected profit improvement from the core food operations, to allow delivery of this core algorithm commitment of 8-10 percent earnings growth throughout its planning horizon.
The company expects to apply initial projected after-tax cash proceeds from the CTG sale of approximately $1.4 billion, based on current working capital levels, primarily to share repurchases, but also toward debt reduction and internal investment opportunities.
Established in 1999 and headquartered in New York City, Ospraie Management, LLC is a leading investment management firm with over $9 billion under management, focused exclusively on commodities and basic industries. Ospraie combines in-depth industry knowledge with financial expertise and a long-duration perspective to identify and execute on attractive opportunities in its investment universe.
The CTG’s operating profits for the nine months ending Feb. 24, 2008, were up 275.9 percent with sales increases of 80.5 percent. The unit, also referred to as ConAgra Foods Inc.’s Trading and Merchandising unit, saw a 219.3 percent increase in profits for the third quarter with sales increases of 92.2 percent.
YTD T&M sales operating profits were $439.0 million on sales of $1.44 billion for the nine months ending Feb. 24, up from the year-ago $116.8 million and $796.0 million. By comparison, ConAgra-wide operating profits were up only 26.5 percent YTD. While T&M saw a 275.9 percent increase, the core Consumer Foods segment was off 9.9 percent. International Foods were off 17.5 percent, while Food and Ingredients were up 20.1 percent.
T&M third-quarter profits were $198.9 million on sales of $563.6 million, compared to the year-ago $62.3 million and $293.3 million, respectively. Agricultural trading and merchandising, most notably wheat, posted a very strong quarter by capitalizing on continued unprecedented market volatility; fertilizer profits also grew, reflecting rising prices and continued strong domestic and global demand. Energy trading results improved slightly over the prior year.
Third-quarter ConAgra-wide operating profit was up 36.8 percent. Again, T&M led the way, up 219.3 percent, with Food and Ingredients up 32.7 percent, while Consumer Foods and International Foods were off 8.1 and 15.9 percent, respectively.
ConAgra-wide YTD net income was $729.3 million ($1.48 per diluted share) on sales of $10.0 billion, versus the year-ago $572.6 million ($1.12 per share) and $8.7 billion, respectively. Third-quarter net income was $309.1 million ($.63 per share) on sales of $3.53 billion, up from the year-ago $192.6 million ($.38 per share) and $2.92 billion, respectively