OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) for ConAgra Foods, Inc. (ConAgra) and its subsidiary, Ralcorp Holdings, Inc. (Ralcorp) at 'BBB-' and has affirmed ConAgra's Short-term IDR at 'F3'. The Rating Outlook is Negative.

Fitch views ConAgra's announcement that it will exit the Private Brands operation and essentially unwind the Ralcorp acquisition (completed just two years ago) as a credit positive, and the company could use potential proceeds to pay down debt to bring leverage down to the low 3.0x range in the near term. However, ConAgra continues to face headwinds in its remaining branded business. ConAgra would have to demonstrate a meaningful track record in stabilizing its volumes and market share in the remaining branded and commercial businesses and a commitment to a conservative financial policy, particularly in the face of activist interest, to maintain its investment grade rating.

A full list of ratings follows at the end of this release.

KEY RATING DRIVERS
ConAgra announced plans to exit its Private Brands operations, essentially unwinding its $6.8 billion acquisition (or 13.2x EV/EBITDA multiple) of RalCorp in January 2013. Profitability in the company's private brands business has been weak. A highly competitive bidding environment, combined with recent service-related issues and execution shortfalls, have negatively impacted results and expectations for volume, pricing and margins in that business.

The Private Brands segment generated roughly $4.1 billion in annual net sales and adjusted EBITDA of approximately $350 million in the fiscal year ended May 31, 2015, accounting for approximately 26% of total revenue and 16% of EBITDA. Based on recent packaged foods trading and transaction multiples, Fitch anticipates ConAgra could receive proceeds of $3.2 billion to $4.2 billion based on a 9x to 12x multiple.

The ongoing business, consisting of Consumer and Commercial operations, currently generates $11.8 billion annual net sales and $1.7 billion operating EBITDA. Considering fiscal 2015 year-end total debt of $7.9 billion, ConAgra would have to pay down approximately $2.3 to $2.6 billion in debt to return gross leverage to the 3.0-3.2x range. However, activist investor Jana Partners, which has disclosed a 7% equity stake, could also push for accelerated change that could result in higher leverage if proceeds are primarily used for shareholder friendly activities.

In addition, should ConAgra even pay down significant debt to bring leverage to the low 3.0x range given its current comments about maintaining a balanced capital allocation that includes a leverage target in the two to three times range, there are significant headwinds in the remaining business. Volumes in its consumer foods business, which accounts for 46% of revenue and approximately 55% of EBITDA, have been in the negative 1% to 3% range for the last five years, offset by only a modest improvement in pricing/mix effect in the 1% range. The company will need to drive productivity improvements in sg&a, supply chain and trade spending to support future investments in marketing, infrastructure, innovation, and acquisitions. In addition, similar to its industry peers, the company will have to reposition its branded portfolio over the next few years to exit low to negative growth brands and invest in health and wellness brands given shifting consumer preferences.

ConAgra plans to outline its long-term financial strategy at an investor event in the fall of 2015, and Fitch will continue to evaluate the impact of its various restructuring activities, use of proceeds from the sale of private brand, and any change in financial strategies that may result from activist actions.

KEY ASSUMPTIONS
--Potential proceeds of $3.2 billion to $4.2 billion for the private brands business, based on EBITDA multiples in the 9-12x range on adjusted EBITDA of approximately $350 million.
--Post the sale of the private brand business, ConAgra would have to pay down approximately $2.3 to $2.6 billion in debt to return gross leverage to the 3.0-3.2x range.
--Remaining Consumer and Commercial businesses currently generates approximately $11.8 billion net sales and $1.7 billion EBITDA. Assuming above mentioned debt paydown, the company will have to drive operating improvements in its ongoing business to maintain or improve EBITDA from current levels.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--If weak top line and operating trends continue and gross leverage (total debt-to-operating EBITDA) remains at or above the mid-3.0x range. Deteriorating FCF or a sizeable leveraged transaction would also support a downgrade.

Future developments that may, individually or collectively, lead to a positive rating action include:
--the Outlook could be revised to Stable if there is a sustained operational improvement in fiscal 2016 and beyond, including stable volumes and market shares in its ongoing businesses, in addition to demonstrating a financial commitment to maintain leverage in the low 3.0x range.
--In the long term, a positive rating action could be supported by consistent positive volume and market share growth due to an improved brand portfolio, strong FCF generation, along with a commitment to maintain leverage in the mid-2x range. This is not anticipated in the intermediate term.

LIQUIDITY
Ample Liquidity, Manageable Maturities: ConAgra maintains an undrawn $1.5 billion revolving credit facility expiring Sept. 14, 2018 that provides backup to its commercial paper (CP) program. The company had $183 million cash, which was mainly outside the U.S., at fiscal 2015 year end. The revolving credit facility contains covenants that consolidated debt must not exceed 65%, and the company's fixed charge coverage ratio must be greater than 1.75x on a rolling four quarter basis. ConAgra's long-term debt maturities primarily consist of $1 billion due in fiscal 2016 and approximately $550 million due in fiscal 2017.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

ConAgra Foods, Inc.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank credit facility at 'BBB-';
--Subordinated notes at 'BB+';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.

Ralcorp Holdings, Inc.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Negative.