A sign outside a TreeHouse Foods-occupied facility in Brantford, Ontario, Canada.
Kristoffer Tripplaar | SIPA USA | AP
Company: TreeHouse Foods Inc. (THS)
TreeHouse Foods Inc. of Oak Brook, Illinois manufactures packaged foods and beverages for consumers, including a variety of shelf stable, chilled, fresh and frozen products. The product categories include beverages, salad dressings, beverage enhancers, pickles, sauces, cereals, pastas and dry foods, cookies and crackers, retail bakeries, aseptic products, jams and other products. The North American Retail Grocery segment sells branded and private label products to customers in the United States and Canada. The Food Away From Home segment sells products to food service customers, including restaurant chains and food distributors in the United States and Canada. The Industry and Export segment comprises the company’s co-pack business and the sale of milk jugs without dairy products to industrial customers for use in industrial applications.
Market value: $ 2.8 billion ($ 50.02 per share)
Percentage ownership: 7.51%
Average cost: $ 41.68
Activist Comment: JANA pursues a value-oriented and research-intensive approach to investing in public safety in special situations, making use of the transaction, legal and financial background of its clients. JANA has extensive experience as an activist. They use various shareholder tools, including letters, proxy battles, shareholder communications, and lawsuits, to achieve their activist goals. However, they have built a reputation for a “diplomacy first” approach. JANA also works with highly qualified executives who bring specific industry knowledge to the situation and give credibility to their arguments.
The company uses activism not just to agitate boards of directors and management, but to implement solid, well-thought-out business strategies that they firmly believe will increase shareholder value.
Barry Rosenstein, managing partner at JANA, calls his activist strategy “V cubed”. The three “Vs” are “(i) Value: You need to shop at the right price with a margin of safety so JANA still has a good investment in case the activism doesn’t work. (II) Voices: You need to know if you can have the votes before starting a proxy battle and (iii) different ways to win: You need to have more than one strategy to add to value.
On January 29, 2021, JANA announced to TreeHouse Foods its intention to nominate three candidates, Meredith Adler (the most senior institutional investor analyst in the food and drug sector for 14 years), John Paul Gainor Jr. (former President and CEO of Dairy Queen) ) and Charles L. Myers (former portfolio manager at Fidelity) for election at the company’s 2021 annual meeting. JANA believes this is an attractive investment opportunity for TreeHouse that has been in a major turnaround for nearly three years.
The company has had constructive discussions with TreeHouse’s board of directors and management about ways to address the undervaluation and total return of the company’s shareholders, including evaluating a sale of the company, business operations, capital allocation, corporate governance and compensation practices.
JANA has extensive experience in this industry with a successful track record in retail for consumers. Their involvement has resulted in the sale of Pinnacle, PetSmart, Safeway, Whole Foods and the spin-off of the Lamb Weston business from ConAgra. The company knows TreeHouse well as a significant portion of its assets were acquired by ConAgra at the urging of JANA.
JANA partner Scott Ostfeld is currently on ConAgra’s board of directors, but don’t look for ConAgra as a potential acquirer. The company is not interested in private label production, which is why it sold the Ralcorp business to TreeHouse for $ 2.7 billion in 2015, less than three years after the acquisition for $ 5 billion.
TreeHouse is a private label only business that is an area with tremendous worldly tailwind. Private label is cheaper for consumers, more profitable for retailers, and doesn’t have the stigma of yesterday’s generic brands (think Whole Foods 365 or Costco’s Kirkland). As a result, shelf space has moved towards private label, with tremendous growth in the US not close to the penetration rate of Europe.
TreeHouse has been in a comprehensive turnaround program for several years, with the help of which the product portfolio, the go-to-market structure as well as the supply chain and service operations have been significantly improved. It’s also a broken stock story, however, in that those operational improvements weren’t reflected in the stock price. TreeHouse is one of the few pure private label manufacturers with no real comps and not a great public company. The option is to sell it to private equity, which has a ton of dry powder and a lot of pressure to do business. In addition, JANA knows most of the potential buyers who have sold many similar companies in the past to companies such as Cerberus, Veritas, BC Partners and Clayton, Dubilier and Rice.
What is TreeHouse worth? In 2018, Post sold a portion of its private label business to Thomas H. Lee Partners for more than ten times EBITDA. A 10-fold multiple would mean that a sale would be executed six times. Similar to Whole Foods, ConAgra and Pinnacle, JANA has again teamed up with world-class executives to nominate them to the board. While their expertise wouldn’t be as necessary in connection with a sale of the company, they could certainly help evaluate a potential sale and they also have tremendous experience in the public markets so they can help clean up the stock’s history in the meantime .
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.