OREANDA-NEWS. There is no rating implication to ConAgra's 'BBB-' Long-term Issuer Default Rating (IDR) following today's announcement that the company will spin off its Lamb Weston business on a tax-free basis. Post the spin off of the Lamb Weston business and the closing of the recently announced sale of its private business to Treehouse, Fitch estimates the remaining consumer food business will have pro-forma sales of $8.9 billion and EBITDA of $1.4 billion for the fiscal year ended May 31, 2015.

Assuming debt paydown in the range of $3.7 billion to $4.6 billion -- with $2 billion to $2.3 billion of the reduction expected with the proceeds of the sale of its Private Brand business -- Fitch expects pro-forma leverage for the remaining business to be in the low 3x range.

ConAgra Foods, Inc. (ConAgra) will separate into two independent public companies. One company will be the existing consumer brands business and the other will be its Lamb Weston business, a foodservice provider of potato products. The transaction is expected to be completed in the fall of 2016 pending board approval, receipt of an opinion from tax counsel and other customary approvals. This follows ConAgra's announcement on Nov. 2, 2015 that it will sell its Private Brand business to TreeHouse Foods, Inc. for $2.7 billion.

The company reported that Lamb Weston accounted for the significant majority of the Commercial Foods segment's fiscal 2015's $570 million in operating profit before corporate expenses. Lamb Weston's EBITDA and margin is likely in the $458 million and 16% range, respectively, which is higher than the corporate average at fiscal year ended May 31, 2015. With this transaction and the Private Brands sale, total EBITDA removed from the overall enterprise could be in the $760 million range.
While the capital structure and capital allocation policy for Lamb Weston had not been finalized, ConAgra reiterated its commitment to an investment grade profile following the separation. Fitch expects that similar to other spin transactions, the appropriate amount of debt would be placed on the entity to be spun off and a dividend made to the parent. Fitch estimates the amount of dividends that would need to be upstreamed and applied to debt reduction at the remaining consumer products level concurrent with the spin to be in the $1.4 billion range in order to maintain leverage at the consumer foods business in the 3x to 3.2x level.

Private Brand Business Sale

ConAgra announced on Nov. 2, 2015 that it has reached a definitive agreement to sell its private label operations to TreeHouse Foods for approximately $2.7 billion in cash and use the proceeds primarily for debt reduction. The transaction is expected to close in the first quarter of 2016.

Profitability in the company's private brands business had been weak with EBITDA margins down more than 500 basis points (bps) to 9% in fiscal 2015 due to a highly competitive bidding environment, combined with service-related issues and execution shortfalls, which had negatively impacted results and near term expectations for volume, pricing and margins. The sale of the private brand business improves pro forma EBITDA for the remaining business (including Weston) to the mid-17% range versus 15.5% in fiscal 2015.

Focus on Core Consumer Branded Business

Volumes in its consumer foods business 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. While early, revenue growth in consumer brands was nearly flat in the first quarter of fiscal 2016. Modest declines were driven by exiting low margin SKU's however, brand support activities on faster growing SKU's will continue.

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 October 2015, CAG announced that it expects to realize at least $300 million of efficiency benefits within the next three years through a combination of reductions in SG&A and enhancements to trade spend processes and tools.

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.

As a result, Fitch expects modest volume declines will continue but EBITDA is expected to be flat to modestly higher given a sense of urgency around cost controls. Continued progress on this front will be needed to maintain the Stable Outlook.

KEY ASSUMPTIONS
--Leverage after the Lamb Weston spin transaction and the sale of its private brand business remains in the low 3.0x range.
--Fitch expects flat to modest volume declines will continue in its core businesses but EBITDA is expected to be flat to modestly higher given cost control initiatives.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--If weak top line and operating trends continue without material offset from debt reduction, such that gross leverage (total debt-to-operating EBITDA) in the low 3.0x range is unsustainable. Deteriorating free cash flow (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:
--A positive rating action is not anticipated in the near term unless there are other strategic portfolio shifts that improve the business and its prospects further.
--In the long term, a positive rating action could be supported by substantial and growing FCF generation, consistent positive volume growth in all segments demonstrating that operational issues have been resolved, along with maintaining leverage in the mid-2x range.

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 $114 million in cash at Aug. 30, 2015. The revolving credit facility contains covenants that consolidated debt must not exceed 65% of consolidated capital during the first four quarters commencing Jan. 29, 2014 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.

Fitch currently rates ConAgra Foods, Inc.'s as follows:

--Long-term Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured notes 'BBB-';
--Bank credit facility 'BBB-';
--Subordinated notes 'BB+';
--Short-term IDR 'F3';
--Commercial paper 'F3'.

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

The Rating Outlook is Stable.