The food fight over Lamb Weston will be messy

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A food fight is breaking out over at Lamb Weston, a leading producer of frozen potato products in the US.

The company, whose customers include McDonald’s, is under fire from Jana Partners. The activist investor has taken a 5 per cent stake in Lamb Weston and is calling for a major shake-up of the board and leadership. Absent that, it said Lamb Weston should consider selling itself. One possible suitor may be Post Holdings, the maker of Weetabix cereals. It is reportedly considering a bid. If true, it might end up biting off more than it can chew.

Lamb Weston certainly needs to take some action. The stock is down 22 per cent this year and its valuation — at just 18 times forward earnings — is well below its three- and five-year averages. Among its problems: demand for its frozen french fries is sputtering as inflation-weary consumers dine out less. Sales have fallen in each of the past two fiscal quarters. Price increases failed to make up for the decline in volume. 

The supply-demand imbalance had another unfortunate knock-on effect: a potato glut. Having purchased more spuds than it needed, the company had to take an $85.1mn charge to write off the excess supplies in its most recent fiscal year. Net income fell 28 per cent to $725.5mn during the period, as other operational issues — including a voluntary product recall and problems related to the rollout of a new software system — also weighed.

In October, Lamb Weston said it was closing factories and laying off 4 per cent of its workforce as restaurant traffic and frozen potato demand remain sluggish.

Jana is right to take Lamb Weston to task. Management badly misjudged potato demand. Capital expenditure, up more than a third at $991.8mn — or 15 per cent of net sales — looks wasted given that the company is now shuttering capacity that it had spent to build up.

Post — whose own potato product empire includes Simply Potatoes — makes for a natural buyer. It reportedly held talks to buy the business back in 2016 when Lamb Weston was still part of ConAgra Foods.

But Jana should not get its hopes up for a quick exit. Post’s market valuation of $6.7bn is much smaller than Lamb Weston’s $11.7bn. Both companies also have plenty of debt, which could complicate the financing of any deal. Post has also done well on its own. The stock is up 26 per cent this year and hit a new high earlier this month. It should not risk giving itself indigestion by swallowing such a big deal.

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