Houston Pension Sues Conagra over Pinnacle Acquisition

Complaint says investors were misled over benefits of $10.9 billion merger.

The Houston Municipal Employees Pension System has filed a securities class action lawsuit against Conagra Brands, claiming the food processing company knowingly misled investors about the benefits of its $10.9 billion Pinnacle Foods acquisition.

Chicago-based Conagra owns food brands such as Reddi-wip, Hunt’s, Healthy Choice, Slim Jim, and Orville Redenbacher’s. In June 2018, Conagra announced its acquisition of Pinnacle, in a cash and stock transaction valued at approximately $10.9 billion. Pinnacle Foods’ brands include Birds Eye, Duncan Hines, Vlasic, Wish-Bone, and Hungry-Man.

“The addition of Pinnacle Foods’ leading brands in the attractive frozen foods and snacks categories will create a tremendous opportunity for us,” said Conagra CEO Sean Connolly when the acquisition was announced.

Conagra said the combination of two companies’ portfolios “will serve as a catalyst to accelerate value creation for shareholders.” It also said that “the combination of two growing portfolios of iconic brands will serve as a catalyst to accelerate value creation for shareholders,” adding that the deal will “enhance Conagra Brands’ multi-year transformation plan and expand its presence and capabilities in its most strategic categories.”

But in December, when Conagra reported its second-quarter results for fiscal 2019, the company said that net sales for the newly acquired Pinnacle were “below expectations due to weak performance across a range of significant brands.”

Operating profit for Pinnacle was $29 million, and adjusted operating profit was $57 million. Conagra said “this performance was below expectations” due to higher transportation costs and lower net sales.

According to the complaint, the announcement caused Conagra’s stock price to fall $4.81 per share, or nearly 17%, on Dec. 20 to $24.28, erasing more than $2.3 billion in market capitalization. The next trading day, Conagra’s stock declined another $2.13 per share, or 8.8%. In three trading sessions, Conagra stock tumbled $8.13 or 30%, to close at $20.96 on Dec. 24, 2018.

“Conagra and its management were aware or recklessly disregarded that the transaction would not result in anywhere near the sort of benefits that defendants had publicly represented,” said the complaint. “As a result of defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s common stock, plaintiff and the other class members have suffered significant losses and damages.”

The lawsuit also names Connolly as a defendant, as well as CFO David Marberger. The complaint says that Connolly and Marberger publicly disseminated allegedly misleading documents, and had the ability and opportunity to prevent their issuance or correct them, but did not.

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