Inside the Rumor Mill That Sent Lamb Weston Shares Soaring--Cue Post Holdings Licking Their Chops...

So it appears Post Holdings,  the cereal slinger behind Raisin Bran and Honey Bunches of Oats, is reportedly eyeing Lamb Weston, the frozen French fry juggernaut, for a potential acquisition. The result? A whirlwind of volatility for both stocks.

(Source: Giphy) 

In short, Lamb Weston shares shot up as much as 9.1% on the news, their biggest jump since… well, before they started this year’s slow spiral into the friggin’ abyss (down 22% year-to-date). Meanwhile, Post Holdings’ stock tumbled nearly 5% because apparently the market thinks buying a French fry company is about as strategic as eating fries right after an E. Coli outbreak. 

(Source: Bloomberg) 

Now with that said, this isn’t Post’s first rodeo with Lamb Weston. Back in 2015, when Lamb Weston was still shackled to ConAgra, Post reportedly sniffed around but walked away empty-handed. Fast forward to today, and Lamb Weston is now dealing with activist investor Jana Partners, who rolled up in October with a 5% stake and a list of grievances longer than a friggin’ CVS receipt. 

Jana’s issue? Years of what they call “self-inflicted missteps.” Translation: Lamb Weston has been fumbling the potato bag. Between lawsuits over alleged price-fixing, a $71M inventory write-down, and a disastrous ERP system rollout (corporate IT strikes again), it’s been a rough year for the fry guys. Oh, and let’s not forget their biggest customer is McDonald’s—so if Ronald sneezes, Lamb Weston catches a cold (cue the E.Coli comment above). 

(Source: Giphy) 

What’s interesting though is that hours before the Reuters report hit, some sharp traders scooped up a boatload of bullish call options on Lamb Weston. These bad boys expire in January and were priced for shares to hit the mid-to-high $70s. When the stock popped to $81 after the news, those traders were sitting on a cool $2 million in paper gains. Coincidence? Sure, and I’m the CEO of Enron LOL.

But, but, but… here’s why the deal could make (some) sense. On paper, a Post-Lamb Weston marriage could deliver some solid synergies. Post already owns Simply Potatoes and Bob Evans Farms—or in layman's terms, the microwave mashed potatoes your aunt serves at Thanksgiving. Therefore, adding Lamb Weston to the mix could turn Post into the undisputed king of carbs.

(Source: Reuters) 

However, the issue is that Lamb Weston is limping into this deal with a laundry list of problems, from operational hiccups to soft retail and foodservice demand. Jana Partners is basically forcing the company to consider “strategic alternatives,” which is basically just a nice way of saying “sell yourself before we make you.”

Meaning, if Post pulls this off, they’ll be doubling down on the comfort food empire. But comfort food comes with its own risks—consumer tastes are bi-polar, supply chains are volatile, and let’s be real, no one wants to be the company busted for price-fixing fries. For now though, we’ll have to wait to see if Post decides to go all-in on this play or if this deal stays frozen. 

(Source: Giphy) 

In the meantime, the market loves a good food fight, and this one has all the makings of a messy, juicy showdown. Oh, and to all the call option bandits who just made bank—congrats on your paper gains. Just remember, the SEC is always watching. Don’t say I didn’t warn ya!

For you loyal and inspiring Stocks.News readers, well, place your bets accordingly and filter all this through a brain-cell. As always, stay safe and stay frosty, friends! Until next time…

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Stocks.News holds positions in McDonalds as mentioned in the article.