Investors unloaded shares of Sara Lee Corp. and ConAgra Foods Inc. yesterday after a news report suggested the two food manufacturers may get caught up in a federal probe of Columbia-based U.S. Foodservice's accounting practices.
The Wall Street Journal, citing an anonymous source close to the investigation, said representatives of the two giant food manufacturers may have colluded with U.S. Foodservice executives to inflate the size of rebates vendors pay in exchange for meeting certain sales goals. The report suggested the probe could grow to include numerous other U.S. Foodservice suppliers.
The news sent shares of ConAgra shares tumbling $1.83, or 8.52 percent, to $19.65. Sara Lee fell $1.17, or 5.89 percent, to $18.69.
Both Sara Lee and ConAgra denied wrongdoing. Sara Lee said it has not been contacted by any federal officials investigating U.S. Foodservice, and ConAgra declined to specify whether it had been contacted in the probe.
Federal investigators began probing U.S. Foodservice's business practices after its Dutch parent, Royal Ahold NV, reported that accounting irregularities at the Columbia unit had led it to overstate 2001 and 2002 earnings by at least $500 million. U.S. Foodservice supplies food to institutional buyers, such as hospitals, hotels and restaurant chains.
Analysts said it is doubtful the matter will materially affect the finances of either Sara Lee or ConAgra. Some suggested investors may be over-reacting to any negative news in the current environment.
"For a packaged food company, ConAgra is undervalued compared to its peers," said Michael R. Kress, an analyst with Pershing LLC. "Same with Sara Lee. I don't see the company being harmed financially."
The Securities and Exchange Commission and U.S. attorney's office in Manhattan are investigating whether executives at U.S. Foodservice purposely inflated the size of vendor rebates the company booked in the past two years.
A source familiar with that investigation told the Journal that representatives of Sara Lee and ConAgra may have knowingly given Ahold's auditors inflated figures for promotional allowances paid by both companies. It's a standard practice for outside auditors to contact a client's suppliers to verify its accounts.
ConAgra said it refused to confirm amounts that were false when contacted by Ahold's auditors.
"ConAgra Foods is a supplier to Royal Ahold and ... received requests from Royal Ahold's outside auditors to confirm amounts payable by ConAgra Foods to Royal Ahold," ConAgra said in a statement released yesterday. "ConAgra Foods systematically refused to verify confirmation requests that were inaccurate."
Sara Lee said it has found no evidence of irregular accounting or conduct.
Sara Lee Chairman and Chief Executive Officer C. Steven McMillan said his company had reviewed all of its records with its food service distributors and found its accounting was appropriate and accurate. He said Sara Lee has yet to be contacted by investigators.
"We are prepared to cooperate fully," McMillan said.