Substitute spreads, frozen meals and courses, and chili are the three categories where Conagra Brands Inc. and Pinnacle Foods Inc. have the most overlap, according to an analysis by J.P. Morgan analysts.
In these three categories, the combined share will be 31.4%, 39.2% and 28.5%, respectively.
J.P. Morgan identified 44 categories of overlap that also include canned meat, dinner sausage, popcorn and hot dog condiments.
Conagra CAG, +0.82% brands include Marie Callender’s, Reddi-wip, Healthy Choice and Slim Jim. Pinnacle Brands PF, +0.49% include Birds Eye, Duncan Hines and Earth Balance. Birds Eye and Marie Callendar’s are $2 billion brands.
Read: Conagra to buy Pinnacle Foods for $8.2 billion
“The merger creates one of the largest frozen food producers in the world,” wrote CFDA’s Joseph Agnese in a note that upgrades Conagra shares to buy from hold. Its target price for Conagra is $41.
“We believe the acquisition makes strategic sense by providing the combined firms with increased scale and negotiating power with customers,” Agnese wrote.
Nielsen data shows that frozen entrées have nearly equal demand among older and younger generations. Items like breaded chicken, waffles and French toast skew towards younger consumers, while ice cream and whipped toppings skew older.
Frozen vegetable sales are up 5.5% year over year, while frozen meat substitutes like veggie burgers are up 19% for the period.
Read: Forget fresh – more diners are filling the fridge with frozen food
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Conagra also reported fourth-quarter results because of the announced deal.
Net income for the quarter totaled $69.6 million, or 18 cents per share, down from $151.3 million, or 36 cents per share, for the same period last year. Adjusted EPS was 50 cents. The FactSet consensus was 44 cents.
Revenue grew to $1.97 billion from $1.86 billion last year, exceeding the FactSet consensus of $1.93 billion.
On the call, Congara executives emphasized the combined strength of the companies’ frozen business as well as the expansion of the snacks category.
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Sean Connolly, Conagra chief executive, called the frozen food category “a large space with long-term tailwinds,” according to a FactSet transcript of the earnings call.
“Frozen is a big piece of real estate in the grocery store that just recently is beginning to undergo the kind of modernization that it needs,” Connolly said.
Conagra shares closed Wednesday down 7.3% and are down 5.1% for the year to date. Pinnacle Foods shares closed down 4.3%, but are up 9.6% for 2018 so far. The S&P 500 SPX, +0.11% is up 0.7% for 2018 to date.
