An activist with value approach takes the next step to turn around a food and beverage manufacturer

TreeHouse Foods Inc. of Oak Brook, Illinois manufactures consumer packaged food and beverages, including a range of shelf-stable, refrigerated, fresh and frozen products. Its product categories include beverages, salad dressings, beverage enhancers, pickles, sauces, cereals, pasta and dry dinners, cookies and crackers, retail bakery, aseptic products, jams and other products. The North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada. The Food Away From Home segment sells products to food service customers, including restaurant chains and food distribution companies within the United States and Canada. The Industrial and Export segment includes the company’s co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications.

Stock Market Value: $2.8 billion ($50.02 per share)

Percentage Ownership:  7.51%

Average Cost: $41.68

Activist Commentary: JANA uses a value-oriented and research-intensive approach to special situation public security investing, capitalizing on the transactional, legal and finance backgrounds of its principals. JANA has extensive activist experience. They use various shareholder tools including letters, proxy fights, shareholder communications and lawsuits to achieve their activist goals. However, they have crafted a reputation for a ‘diplomacy first’ approach. JANA also partners with highly credentialed executives who bring specific industry expertise to the situations and lend credibility to their arguments.

The firm does not use activism simply to agitate boards and management, but to implement sound, well-conceived business strategies that they strongly believe will enhance shareholder value.

Barry Rosenstein, managing partner at JANA, calls his activist strategy “V cubed”. The three “Vs” are”(i) Value: you need to buy in at the right price with a margin of safety so that JANA still has a good investment in the event the activism does not work; (ii) Votes: you need to know whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: you need to have more than one strategy to enhance value.

On January 29, 2021, JANA notified TreeHouse Foods of their intent to propose three nominees, Meredith Adler (Institutional Investor’s top ranked 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 represents an attractive investment opportunity with TreeHouse nearly three years into a comprehensive turnaround.

The firm has had constructive discussions with TreeHouse’s board and management regarding avenues to resolve the company’s undervaluation and total stockholder return, including evaluating a sale of the company, operations, capital allocation, corporate governance and compensation practices.

JANA has extensive experience in this industry, with a successful track record in the consumer retail space and their involvement has led to sales of Pinnacle, PetSmart, Safeway, Whole Foods and ConAgra’s spinoff of its Lamb Weston business. The firm knows TreeHouse well as a significant part of its assets were acquired from ConAgra at JANA’s urging.

JANA partner Scott Ostfeld is presently on the board of ConAgra, but don’t look for ConAgra to be a potential acquirer. It is not interested in private label production, which is why it sold the Ralcorp business to TreeHouse in 2015 for $2.7 billion, less than three years from acquiring it for $5 billion.

TreeHouse is a pure play private label business, which is an area of tremendous secular tailwinds. Private label brands are cheaper for consumers, more profitable for retailers and do not have the stigma of generic brands of yesteryear (think Whole Foods 365 or Costco’s Kirkland).  As a result, shelf space has been migrating towards private label space, with tremendous growth in the US, which is not close to the penetration level of Europe.

TreeHouse is multiple years into an extensive turnaround program that has helped it significantly improve its product portfolio, go-to-market structure, and supply chain and service operations. However, it is also a broken equity story in that these operational improvements have not been reflected in the stock price. As one of the only pure play private label manufacturers, with no real comps, TreeHouse is not a great public company. The opportunity is for it to be sold to private equity, who has a ton of dry powder and a lot of pressure to do deals. Moreover, JANA knows most of the potential buyers having sold many similar companies in the past to firms like Cerberus, Veritas, BC Partners and Clayton, Dubilier and Rice.

So, what is TreeHouse worth? In 2018, Post sold part of its private label business to Thomas H. Lee Partners for over 10 times EBITDA. A 10 times multiple here would imply a six handle on a sale. Similar to their engagements in Whole Foods, ConAgra and Pinnacle, JANA has yet again teamed up with world-class executives who they are nominating to the board. While their expertise would not be as necessary in the context of a sale of the company, they could certainly help evaluate a potential sale, and they have tremendous experience in public markets as well, so they can help rehabilitate the equity story in the meantime.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.