3rd UPDATE: Ralcorp Rejects ConAgra's $4.9 Billion Buyout Offer

Ralcorp Holdings Inc. (RAH) rejected a $4.9 billion buyout offer from ConAgra Foods Inc. (CAG), shooting down an attempt by ConAgra to become a bigger private-label powerhouse.

Ralcorp said its board unanimously rejected ConAgra's all-cash offer of $86 a share, saying it wasn't in the best interest of shareholders. It also adopted a shareholder rights plan, more commonly referred to as a poison pill, to prevent someone from buying the company without an adequate premium.

"We are confident that Ralcorp has a strategic plan and proven management team that will continue to generate significant shareholder value in the future," Ralcorp Chairman William Stiritz said.

ConAgra says it remains interested in speaking with Ralcorp about a potential deal.

"We continue to be very enthusiastic about the potential combination of Ralcorp and ConAgra Foods," ConAgra spokeswoman Teresa Paulsen said. "We are very interested in discussions with Ralcorp, and we continue to believe this is a very good opportunity for shareholders of both companies."

Ralcorp shares were recently at $87, up 4.4% on the day but down from an earlier high of $90.20. ConAgra shares were up 1.7% at $25.19 in recent trading.

ConAgra earlier Wednesday disclosed its offer for Ralcorp, the owner of Post cereals and maker of private-label pasta, crackers, jams and other items, sweetening a bid from an $82-a-share offer in cash and stock made in March.

ConAgra's offer represents a 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 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 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 on to 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 to 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-food service 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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