2nd UPDATE: ConAgra Makes $4.9 Billion Bid For Ralcorp
May 04 2011 - 10:15AM
Dow Jones News
ConAgra Foods Inc. (CAG) publicly disclosed a $4.9 billion offer
to buy Ralcorp Holdings Inc. (RAH), sweetening a previously
rejected proposal, in a bet by ConAgra that private-label food
sales will continue to grow.
ConAgra is offering $86 a share in cash for Ralcorp, the owner
of Post cereals and maker of private label pasta, crackers, jams
and other items, higher than an $82 a share offer in cash-and-stock
made in March. The offer is a 3.2% premium to Ralcorp's closing
price on Tuesday, though 25% higher than the one-month average
before news reports said Ralcorp had been approached. The deal also
includes the assumption of about $2.5 billion in debt.
Ralcorp didn't immediately return a call for comment. Late
Sunday, the company confirmed that in March it received and
rejected a takeover offer.
Ralcorp has refused to meet with ConAgra about the deal, and
there are some signs that the St. Louis-based company may be
digging in. Its second-quarter results released Sunday came in
above expectations, showing adept cost management in the face of
inflation. Sales of Post cereals also improved compared to prior
quarters.
Ralcorp also announced a $100 million cost-savings program to
boost profit over the next three years, which some analysts
speculated that disclosing the internal cost-savings program was an
attempt to extract a higher bid.
In early trading, Ralcorp shares were up 7.8% at $89.79, as
investors hope for a higher bid. ConAgra shares were up 3.4% at
$25.58 recently.
In Ralcorp, ConAgra is looking to cement a leading position in
the private-label category. The recession has sparked growth among
private-label goods, and retailers have become eager to hold onto
those gains when the economy improves, since private-label offers
attractive profits.
"Value is here to stay and private label is a big part of the
value equation for retailers and for consumers," Chief Executive
Gary Rodkin said on a conference call with analysts.
Sales of private-label products have grown from 16.4% of sales
in the supermarket channel to 18.9% in the U.S. during the last
five years, helped in part by the recession. Retailers have also
devoted more attention that segment, mindful of holding on to
cost-conscious consumers.
ConAgra will look to increase what would be a combined $4
billion private-label business alongside national brands like
Hebrew National hotdogs, Hunt's ketchup and Peter Pan peanut
butter. That can be a tough portfolio to manage, as growth of
private-label means less shelf space for branded items.
ConAgra says it already has experience managing that balance
through its business that includes products on both sides. ConAgra
makes private-label product for retailers including Wal-Mart Stores
Inc. (WMT), Kroger Co. (KR) and others.
"We have a pretty good understanding on how to manage that
because we do that today," Rodkin said in an interview.
It will also take on Ralcorp's Post cereals business in the
deal, which will pit it head-to-head with Kellogg Co. (K) and
General Mills Inc. (GIS) in the category.
The combined company would have a sales mix of about 50% retail
branded, 25% commercial-foodservice and 25% private label,
according to ConAgra.
ConAgra expects the combined operations will result in annual
cost savings of about $250 million a year by the third year after
the deal closes, mostly from supply-chain efficiencies. It expects
the deal to be accretive to earnings in the first year.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com
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