The for-sale signs could soon be going up at Lamb Weston Holdings judging by the language used by activist investor Jana Partners.

And investors could well be rejoicing as the shares in one of the world’s largest French fries suppliers have slumped 27% this year on the New York Stock Exchange. They rallied more than 10% last Friday, when the activist revealed it had paid $336m for a 5% stake but have since retreated.

Market context around the slide would be well placed. The trouble is, Lamb Weston’s nearest competitors – McCain Foods and JR Simplot – are both privately-owned. The shares have fallen a further 2% this week to $77.38 as of the close of play on Thursday (24 October), compared to around $106.50 at the start of the year.

Nevertheless, no doubt all three are experiencing the same subdued restaurant traffic in North America as consumers continue to prioritise eating at home amid tight household budgets.

McDonald’s, for instance, is Lamb Weston’s largest customer, accounting for 14% of its $6.5bn fiscal 2024 sales revenues. But, since the start of the year, Lamb Weston has also reported softness elsewhere, in retail, where it plays in branded frozen products and private label.

For Lamb Weston, however, the challenging environment has been compounded by other issues – a $71m write-down on raw potato inventories as it overestimated a pick-up in consumer demand and problems implementing a new ERP system, resulting in a cut in sales and profit forecasts in April.

Another downgrade followed earlier in October, with net income and EPS targets slashed by north of 30% each, although sales estimates were left alone at the first-quarter reporting stage of the 2025 financial year.

Jana Partners said last week Lamb Weston’s shares were “undervalued and represent an attractive investment opportunity”, citing the “litany of self-inflicted missteps that have led to underperformance for shareholders”.

Those comments came within weeks of Lamb Weston revealing the closure of its Connell, Washington, plant with the loss of hundreds of jobs and more to come amid plans to cut 4% of the total workforce. Production at other sites is also being curtailed until the mismatch between supply and demand peters out.

Disposal odds

But what might Jana Partners overarching intentions be? It’s common in such cases to declare nominees to the target company’s board of directors to press for change in policy or leadership.

Jana Partners effectively did that in its filing with the US Securities and Exchange Commission (SEC), naming five “shareholder nominees” within its multi-point advocacy plan put to Lamb Weston, which suggested in a response that it will “consider” the investor’s views.

However, in the strongest indication that a sale may be the preferred option, Jana Partners said it would pursue an “initiation of a review of strategic alternatives, particularly given the history of interest in the issuer [Lamb Weston] and the issuer’s poor performance for shareholders”.

Matthew Smith, an analyst at US investment bank Stifel, was forthright in his assumptions, suggesting Jana Partners will act sooner rather than later before shareholders can gather round the table.

“We believe Jana will continue to push Lamb Weston towards a sale ahead of the proxy process,” Smith wrote in a research note, referring to the director nominations window from 29 May to 28 June ahead of next year’s AGM.

Smith added: “We are not surprised by activist involvement given the volatility in shares, valuation contraction and company missteps as the industry works through a period of over-supply.

“Valuation stands well below historical levels, reflecting softer away-from-home traffic trends and pricing concerns as the industry contends with excess capacity.”

Potential buyers

If Lamb Weston is to end up on the for-sale market, might McCain Foods or Simplot be potential suitors? That remains to be seen, if such a scenario unfolds, but Smith suggests the company could fall into “private” hands.

“We do not believe large-cap food companies are likely buyers but believe LW would benefit from a private buyer given the traffic and capacity challenges over the near term,” he wrote.

Sales and volume pressures were again evident in Lamb Weston’s fiscal 2025 first-quarter results, which accompanied the plant-closure announcement, and the volume decline was more pronounced in North America, its largest market.

Group sales dropped 1% to $1.7bn. Volumes fell 3% due to customer losses and the “soft” restaurant traffic, with a positive price/mix of 2%.

North America sales decreased 3% to $1.1bn, accompanied by a 4% volume decline and price/mix of 1%.

Robert Moskow, a food and beverage analyst at US investment bank TD Cowen, alluded to the competition dynamics in a follow-up note.

“Lamb Weston's better-than-expected pricing in 1Q indicates that competitors are not feeling the same capacity utilisation problems as LW and do not feel the need to cut prices to aggressively compete for customers that LW needs to regain/retain following their calendar 1Q-24 ERP execution misstep.

“In addition, LW's plant closure/idling improves our capacity utilisation model to 89% by 2027.”

Moskow, meanwhile, suggested restaurant outings may be poised to pick up, painting a brighter outlook for Lamb Weston into the new calendar year.

“While certainly not good, customer foot traffic at QSR has stabilised at a -2% rate of decline, compared to last year, due in large part to value meal offerings. Key customer McDonald's has spoken to better trends,” he said.

“The lower interest-rate environment and getting past the 2024 US election uncertainty suggests a better demand backdrop for next year.”

Asked to share his views on whether Jana Partners will push for a sale of Lamb Weston or a change of leadership, Moskow declined to provide insight beyond the comments made in his research note.

Jana “nominees”

Tom Werner has headed up Lamb Weston as president and CEO since November 2016, when the company emerged as a spin-off from what was then ConAgra Foods. He is also a board member.

Jana Partners’ nominees include Bradley Alford, Diane Dietz, John Gainor Jr., Timothy McLevish, and Joseph Scalzo.

Scalzo is the ex-CEO of The Simply Good Foods Company, while Alford was a former chief of Nestlé’s US division. Dietz has served as a board member at a number of US firms and was once an executive at Safeway.

Gainor’s previous board seats include that of TreeHouse Foods and he was once the CEO of the International Dairy Queen fast-food chain. McLevish is a managing partner at Strategic Advisory Partners and was executive chair of Lamb Weston from 2016-17. He is also a former CFO of Kraft Foods.

Continental Grain’s involvement

Another red flag was raised suggesting that Jana Partners may pursue, and press for, a sale of Lamb Weston – a partnership with agri-food firm and investor Continental Grain Co. (ContiGroup).

A simultaneous filing with the SEC last Friday, cross-referenced with Jana Partners’ own filing, showed Continental Grain paid $24m to acquire shares in Lamb Weston amounting to less than a 1% stake.

Continental Grain has an investment interest in Restaurant Brands International, which owns the Burger King, Popeyes, Tim Hortons and Firehouse Subs restaurants and fast-food chains.

And in 2021, Continental Grain joined forces with US agri-food giant Cargill to acquire chicken processor Sanderson Farms for $4.5bn – a company merged with Continental Grain's portfolio business Wayne Farms and now trading as Wayne-Sanderson Farms.

“ContiGroup's involvement presents an interesting twist given their successful track record in the agri-business space as an operator (partnering with Cargill to acquire Sanderson Farms) and as an investor (soybean processor Bunge),” Moskow observed.

“At a minimum, it heightens LW management's sense of urgency to improve their lacklustre performance.”

Smith at Stifel was similarly intrigued.

“We find the Continental Grain angle interesting. The business would fit nicely in Continental’s portfolio but we do not believe the firm would need partners to acquire Lamb Weston outright,” Smith said.

He explained his valuation thesis in the context of both Lamb Weston’s recent struggles and the challenges the frozen-potato products sector in North America is currently facing.

“Shares traded near nine times EBITDA using our FY-26 estimates prior to the activist news, well below LW’s historical valuation range near around 13 times.

“We believe fair value in a take-out would be in the $90 range, or 11.5 times EBITDA, closing the gap to the packaged foods group but still a discount, reflecting this period of softer restaurant traffic and medium-term excess capacity concerns for the industry.”

Jana Partners wrapped up its intentions, referring to the nominees as ‘reporting persons’, within the framework of the multi-advocacy plan set forth in its SEC filing.

“The reporting persons intend to communicate with the issuer’s management and board [Lamb Weston] about, and may enter into negotiations and agreements with them regarding the foregoing, and communicate with other shareholders or other third parties regarding the issuer.

“The reporting persons may also take other steps to increase stockholder value, as well as pursue other plans or proposals that relate to, or would result in, any of the matters set forth.”