Activist Jana Returns to the Kitchen at Lamb Weston: Strategies for Enhancing Value

Ownership: 5.35%

Average Cost: $60.75

Activist Insights: Founded in 2001 by Barry Rosenstein, Jana Partners has established a reputation as a seasoned activist investor. The firm’s approach is marked by in-depth research and well-thought-out strategies aimed at enhancing long-term value. Rosenstein’s methodology, dubbed “V cubed,” emphasizes three core principles: (i) securing value through appropriate pricing, (ii) ensuring preemptive stakeholder support in proxy contests, and (iii) employing multiple strategies to capitalize on opportunities. Over the years, Jana’s focus has gradually shifted towards a model characterized by the three “Ss”: (i) targeting attractive stock prices, (ii) advocating for strategic movements such as company sales or spinoffs, and (iii) pairing with top industry executives to enhance advisory roles and, if necessary, seeking board representation.

As one of the leading suppliers of frozen potato products globally, Lamb Weston holds the top position in North America and ranks second worldwide. The company has been a key player in the market for over seven decades, supplying a diverse array of potato products to various industries including food service and retail. Historically, Lamb Weston has enjoyed favorable market conditions including heightened demand and impressive profit margins. Acquired by ConAgra Brands in 1988, Lamb Weston saw significant strategic moves in 2015 when Jana Partners took an activist stance aimed at improving the company’s operational efficiency and separating its underperforming segments.

After a period of challenging negotiations, including an attempt by Post Holdings to merge with the company, Lamb Weston successfully spun off from ConAgra in November 2016, with Tom Werner at the helm as CEO. Initially, the company thrived, showing remarkable growth with net sales increasing at an annual growth rate of 9% and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rising at 10% annually over several years. However, since mid-2023, Lamb Weston has faced significant downturns, with shares falling over 30% amidst broader market gains. The 2024 Q4 earnings report was particularly disheartening, revealing a 5% drop in net sales and a steep decline in adjusted EPS, attributed to market share losses and decreased restaurant traffic stemming from menu price inflation.

This downtrend has provided Jana Partners with an opportunity to step in at a critical moment. The activist firm has identified key issues within Lamb Weston, including misallocated capital investments, operational failures, and deficiencies in corporate governance. Notably, Lamb Weston’s current capex, projected at nearly 14% of sales, raises concerns, particularly as the company attempts to offset declining revenue with increased spending. The uptick in capital expenditures hasn’t translated to enhanced operational efficiency, leading to significant losses, including approximately $100 million worth of potatoes due to miscalculations regarding customer demand and plant capabilities.

With a seasoned team of industry veterans now aligned with Jana, the firm appears poised to implement substantial changes to Lamb Weston’s approach. The goal will be to rectify identified missteps in capital allocation, streamline operational practices, and enhance relationships with customers. Should Jana succeed in placing its nominees on the board, it could facilitate a shift towards more efficient management and strategic alignment with shareholder interests. The prospect of a management overhaul looms, particularly for CEO Tom Werner, whose continued leadership may be unlikely if Jana gains traction.

Additionally, considering Jana’s successful history in corporate activism, there are implications for possible strategic transactions. Post Holdings has been suggested as a potential partner given its successful growth trajectory post-spinoff. Speculation around a potential acquisition offer exceeding $100 per share could prompt the board to carefully weigh this opportunity against the company’s long-term operational aspirations.

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. Lamb Weston is owned in the fund.