Omaha, Neb., Mar. 27 - ConAgra Foods, Inc., announced today 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 and other investors for approximately $2.1 billion, subject to certain adjustments.
The Ospraie Special Opportunities fund 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.
Under the terms of the agreement, ConAgra Foods will sell the operations of ConAgra Trade Group, also known as the company’s 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.
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.
“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, chief executive officer of ConAgra Foods. “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.”
John Duryea, portfolio manager of the Ospraie Special Opportunities fund, said, “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. 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.”
Additional details of the transaction include:
Select trading and merchandising personnel dedicated to buying key commodities used in ConAgra Foods’ products and for its operations will become part of ConAgra Foods’ enterprise procurement function. Dedicated personnel will continue to monitor the value at risk and risk limits associated with the ongoing procurement needs of ConAgra Foods.
Given the large working capital requirements for the Trading and Merchandising segment’s operations in recent periods, the company is expecting lower and more predictable ongoing working capital requirements for ConAgra Foods following completion of the sale. Over time, this should result in more consistent operating cash flows. ConAgra Foods intends to continue to use share repurchases as the benchmark for its capital allocation decisions.
ConAgra Foods confirmed that the items announced today would not change its long-term EPS annual growth expectations of 8-10 percent, excluding items impacting comparability. Despite forgoing operating income from the Trading and Merchandising 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 ConAgra Trade Group 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.
Additional information on the announced sale
Ospraie and Gavilon have received commitments from a bank lending group for operating financial support for Gavilon in excess of $1.5 billion, subject to customary conditions. A summary term sheet for the ConAgra Trade Group sale, as well as the earnout and warrant structure, follows this release. The transaction has been approved by the ConAgra Foods Board of Directors.
Advisors
Centerview Partners, LLC acted as primary financial advisor to ConAgra Foods and provided a fairness opinion on the transaction. UBS Investment Bank also acted as a financial advisor to ConAgra Foods. Credit Suisse served as financial advisor to Ospraie, while J.P. Morgan Securities Inc. is acting as lead arranger of the acquisition financing and of the Gavilon stand alone credit facilities.