Company: Lamb Weston Holdings (LW)

Business: Lamb Weston is a global producer, distributor and marketer of value-added frozen potato products. The company is a supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers around the globe. Lamb Weston's frozen potato products are sold in North America and international markets generally to North American-based restaurant chains and international customers, comprised of global and regional quick service and full-service restaurant chains, food-service distributors and retailers. Its product portfolio includes frozen potatoes and appetizers sold under the Lamb Weston brand, as well as many customer labels.

Stock Market Value: $10.99B ($77.09 per share)

Activist: Jana Partners

Ownership: 5.35%

Average Cost: $60.75

Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. The firm made its name by taking deeply researched activist positions with well-conceived plans for long term value. Barry Rosenstein called his activist strategy "V cubed." The three "Vs" were (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, the firm has gradually shifted that strategy to one which we characterize as the three "Ss" (i) Stock price: buying at the right price; (ii) Strategic activism: sale of company or spinoff of a business; and (iii) Star advisors/nominees: aligning with top industry executives to advise them and take board seats if necessary.

What's happening

Jana, along with Continental Grain, intends to have discussions with Lamb Weston regarding a slate of topics. They include Lamb Weston's financial performance and core operating deficiencies, capital spending, share repurchase strategy and execution, investor communications, executive compensation, corporate governance and the initiation of a strategic review. Additionally, Jana has entered into nomination agreements with (i) Bradley Alford, former chairman and CEO of Nestlé USA; (ii) Diane Dietz, former president and CEO of Rodan & Fields and past CMO of Safeway; (iii) John P. Gainor Jr., former president and CEO of International Dairy Queen; (iv) Timothy R. McLevish, former executive chairman of the board of Lamb Weston and past CFO of Kraft Foods; and (v) Joseph E. Scalzo, former president and CEO of The Simply Good Foods Co.

Behind the scenes

Lamb Weston is one of the largest frozen potato suppliers in the world, ranking No. 1 in North America and No. 2 globally. For over 70 years, the company has produced and distributed frozen fries and other potato products to restaurants, food service distributors and retailers. In North America, it is one of three to four major players in an oligopolistic market and has been the beneficiary of tailwinds such as increased demand, minimal labor required and high gross margins. Lamb Weston was initially acquired by ConAgra Brands in 1988. In June 2015, Jana filed a 13D on ConAgra, at which its campaign was tripartite: (i) margin improvement; (ii) separation of its underperforming private label business, Ralcorp; and (iii) the separation of its trophy asset Lamb Weston, which the firm said was being lost and not properly valued within ConAgra. The company and Jana would enter into a cooperation agreement shortly thereafter, pursuant to which ConAgra agreed to increase the size of the board by two members and appointed Jana designees Bradley A. Alford (the former CEO of Nestlé USA) and Timothy R. McLevish (the former CFO of Kraft Foods) to the board. In November 2015, ConAgra agreed to sell Ralcorp to Treehouse Foods and announced its plans to separate Lamb Weston in the fall of 2016. 

In June 2016, it was reported that talks to conduct a transaction between cereal-maker Post Holdings and Lamb Weston collapsed, likely on the one-yard line considering how close this was to management's fall target for the spin. Following this failure, management was forced to rush to conduct the spin-off of Lamb Weston, which was completed in November 2016. The new company would be led by CEO Tom Werner, who still serves in the role today. Werner had been somewhat of a journeyman within ConAgra, having formerly been the company's president of commercial foods and interim president of private brands. He was an interesting choice to lead the newly spun-off Lamb Weston, considering his unknown profile to the Street at the time. To bolster the company's oversight, Jana's ConAgra designee and the former Kraft CFO McLevish was named executive chairman of Lamb Weston. Under the combined tenure of McLevish and Werner, the stock rose 46% to $46.58 per share by the time McLevish stepped down following the company's annual meeting in September 2017.

The company's performance following the spin was excellent for many years. As of Lamb Weston's investor day in October 2023, things appeared good. From FY17 to FY23, the company had grown net sales at a 9% compound annual growth rate and adjusted earnings before interest, taxes, depreciation and amortization at a 10% CAGR. It also improved adjusted gross margins by 340 basis points. In addition, less than seven years after the spinoff, Lamb Weston's shares were trading at around $115 in June 2023, a total shareholder return of over 259%, versus 98% for the S&P 500, and 63% for the S&P 500 Food & Beverage. However, things have not been going well since then. In 2024, prior to the announcement of Jana Partners' stake, Lamb Weston's shares were down over 30%, while the S&P 500 is up over 20%. In July 2024, the company announced its Q4 earnings, which fell way short of expectations. The company reported that net sales dropped 5% year over year and adjusted EPS fell 40% to 78 cents, well below estimates of $1.26 per share. The company cited market share losses and a slowdown in restaurant traffic due to menu price inflation that was greater than expected, as well as a voluntary product withdrawal as factors.

This poor performance of an excellent, but struggling, fry maker has opened the door for a new cook in the kitchen: Jana Partners. Now, things are beginning to heat up. The primary issues facing this company highlighted by Jana are capital misallocation, a series of operational blunders and corporate governance failings. First, on capital allocation, the company has been spending on increasing capacity in an intense pursuit of growth at any cost. At the Lamb Weston's investor day, it registered capital expenditure as a percent of sales of nearly 14% in 2023. The company projected it would be 12% to 13% in 2024 and 2025, respectively, and 9% long term. Lamb Weston's maintenance capex is around 3%, and the company doesn't provide very much detail on what exactly it needs an additional 600 basis points for nor why the capex budget should automatically increase proportionally to revenue without any evaluation as to what is needed. In addition, very unusually, the company has doubled revenue since its spin, yet it has been increasing selling, general and administrative expenses as a percent of net sales for several years, and the company set an increased 10.5% to 11% long-term target. It is a little suspicious that the current executive compensation plan prioritizes revenue and EBITDA growth in dollar terms, which incentivizes management to spend as much capex as they want to grow revenue and EBITDA, even if it means a decrease in cash flow. While the expected silver lining to the enormous capex spend would be more capacity and an increase in market share, through several self-inflicted operational blunders the company has in fact lost many customers and degraded its performance. First, Lamb Weston improperly executed a rollout of a new enterprise resource planning system, which has led to difficulties tracking and supplying product to its customers. In addition, in an attempt at increasing its margins, the company cut lower-margin customers in favor of higher-margin ones, before signing up the higher-margin customers. This left Lamb Weston with usable facilities that were being shut in favor of the newer facilities that were not near capacity and product that it could not sell. This forced the company to waste nearly $100 million worth of potatoes.

Now, Jana, who knows this company very well, is back with an all-star roster of industry executives, two of whom were there with the firm almost 10 years ago when it orchestrated the spinoff of Lamb Weston. Along with strategic partner Continental Grain and former Lamb Weston executive chairman McLevish, Jana is also working with Scalzo, former CEO of Simply Good Foods; Dietz, former CMO of Safeway; Alford, former CEO of Nestlé USA; and Gainor, former CEO of International Dairy Queen. This is a team built for a board refreshment: five industry executives, Continental Grain and members of Jana, who know this industry and company well. We expect that Jana will look to get five of these individuals on to the 11-person board. If empowered to act, through either a settlement or shareholder support at the next annual meeting, Jana will work to correct Lamb Weston's numerous operational and capital allocation missteps. Next, the firm will work to get the company's capex and SG&A under control, boost free cash flow and ensure that management incentives are aligned with shareholder value creation. In addition, there will need to be some serious operational improvements to remedy the company's strained relationship with many current and former customers. Management decisions would not be made until a refreshed board got an inside look at Lamb Weston, but a new management team would likely go a long way regaining the company's credibility with customers and investors. Further, almost any one of Jana's nominees could arguably take over as CEO: It is hard to see a scenario where CEO Werner would continue in his post if Jana were to win here.

Lastly, as always with Jana, there remains a strategic angle considering the firm's successful track record in this form of activism. Post remains a good candidate for a potential transaction. Since Lamb Weston's spin, Post has delivered a total return of over 120% and is widely considered to have one of the best management teams in consumer packaged goods. Extrapolating from the failed 2016 deal and adjusting for EBITDA growth, it would not be surprising to see a takeout offer north of $100 per share. If that were the case, the board would have to evaluate that value for shareholders versus the long-term prospects of an operational plan, and it would be very helpful having a partner from Jana on the board for that analysis.

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.