Jana, the activist, returns to Lamb Weston's kitchen. What may occur next is uncertain.

Company: Lamb Weston Holdings (LW)

Lamb Weston is a global supplier of value-added frozen potato products, including appetizers and vegetables, to restaurants and retailers worldwide. Its products are sold under the Lamb Weston brand, as well as many customer labels, and are distributed in North America and international markets.

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

Activist: Jana Partners

Ownership: 5.35%

Average Cost: $60.75

Jana, founded in 2001 by Barry Rosenstein, is a highly experienced activist investor known for its well-researched positions and long-term value plans. Rosenstein's activist strategy, dubbed "V cubed," focused on three key elements: value, votes, and variety of ways to win. Since 2008, the firm has shifted its strategy to a three-pronged approach, which we refer to as the "Ss": stock price, strategic activism, and star advisors/nominees.

What's happening

Jana and Continental Grain plan to discuss various topics with Lamb Weston, including financial performance, core operating issues, capital spending, share repurchase strategy, investor communications, executive compensation, corporate governance, and the initiation of a strategic review. Jana has also entered into nomination agreements with five individuals, including Bradley Alford, Diane Dietz, John P. Gainor Jr., Timothy R. McLevish, and Joseph E. Scalzo.

Behind the scenes

Lamb Weston is a leading global supplier of frozen potato products, ranking No. 1 in North America and No. 2 worldwide. For over 70 years, the company has produced and distributed fries and other potato products to restaurants, food service distributors, and retailers. In North America, Lamb Weston is one of the major players in an oligopolistic market and has benefited from tailwinds such as increased demand, minimal labor requirements, and high gross margins. The company was initially acquired by ConAgra Brands in 1988 and later became a focus of a takeover bid by Jana Partners in 2015. Jana's campaign aimed to improve margins, separate the underperforming private label business, Ralcorp, and separate Lamb Weston, which Jana believed was being lost and not properly valued within ConAgra. As a result, ConAgra agreed to increase the size of its board and appoint Jana designees to the board. In November 2015, ConAgra sold Ralcorp to Treehouse Foods and announced plans to separate Lamb Weston in the fall of 2016.

In June 2016, talks between cereal-maker Post Holdings and Lamb Weston fell apart, likely due to management's failure to meet their fall target for the spin. As a result, management rushed to complete the spin-off of Lamb Weston, which was completed in November 2016. The new company was led by CEO Tom Werner, who had previously been the company's president of commercial foods and interim president of private brands. Werner was an interesting choice to lead the newly spun-off Lamb Weston, as he was relatively unknown 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.

Since the spinoff, Lamb Weston's performance has been excellent for many years. From FY17 to FY23, the company grew net sales at a 9% compound annual growth rate and adjusted earnings before interest, taxes, depreciation and amortization at a 10% CAGR. The company also improved adjusted gross margins by 340 basis points. In addition, 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

Jana Partners has identified several issues facing Lamb Weston, including capital misallocation, operational blunders, and corporate governance failings. The company has been spending heavily on increasing capacity in pursuit of growth, with capital expenditure as a percentage of sales projected to be 12% to 13% in 2024 and 2025, and 9% long term. However, the company has not provided much detail on what it needs an additional 600 basis points for, and the capex budget automatically increases proportionally to revenue without any evaluation as to what is needed. Additionally, the company has doubled revenue since its spin, but has been increasing selling, general and administrative expenses as a percentage of net sales for several years, with an increased 10.5% to 11% long-term target. 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. Despite the expected silver lining to the enormous capex spend, Lamb Weston has lost many customers and degraded its performance through

Jana, who has extensive knowledge of the company, has assembled a team of industry executives to refresh the board. The team includes former Lamb Weston executive chairman McLevish, Continental Grain, and former executives from Nestlé USA, Simply Good Foods, and Safeway. Jana aims to appoint five of these individuals to the 11-person board. If empowered, Jana will work to correct Lamb Weston's operational and capital allocation mistakes, control capex and SG&A, boost free cash flow, and align management incentives with shareholder value creation. The company's strained relationship with customers will also need to be addressed through operational improvements. A refreshed board will review management decisions, and it is possible that Jana's nominees could take over as CEO.

Jana's strategic angle is to consider the firm's successful track record in activism when evaluating a potential transaction for Post. Since Lamb Weston's spin, Post has delivered a total return of over 120% and has a highly regarded management team in consumer packaged goods. If a takeout offer of over $100 per share were to be made, the board would need to weigh the value of this offer against the long-term prospects of an operational plan. Having a partner from Jana on the board would be beneficial for this analysis.

13D Monitor, founded by Ken Squire, is an institutional research service on shareholder activism, and he is also the portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Lamb Weston is owned by the fund.