UPDATE:Ralcorp To Spin Off Post Foods Unit, Offers Weak View

Ralcorp Holdings Inc. (RAH) is splitting up its Post Foods cereal and private-label food businesses, throwing a curve ball into ConAgra Foods Inc.'s (CAG) attempt to buy the entire company.

Ralcorp late Thursday disclosed a proposed tax-free spinoff into two publicly traded companies owned by Ralcorp's current shareholders.

The transaction is structured to avoid a big tax bill for Ralcorp. Selling Post Foods could have resulted in a tax bill of up to $1 billion, a person familiar with the matter said, so Ralcorp never put the business up for sale.

However, once the spinoff takes place, either one of the companies can be sold without the tax burden coming into play, the person said.

Ralcorp is awaiting word from the Internal Revenue Service or another satisfactory legal ruling that the spinoff can go through tax-free.

The move comes as ConAgra has on the table a $4.9 billion offer to buy Ralcorp in its entirety. Ralcorp rejected the offer in May. Aside from reiterating its interest last month, ConAgra hasn't countered with another offer.

ConAgra covets Ralcorp for its private-label business, which makes low-priced pasta, cereal and other foods to supermarkets, which then sell the products under their own in-house brands. The deal would have combined ConAgra's nearly $850 million in private-label sales with Ralcorp's $3.5 billion business to create a powerhouse in the space.

Ralcorp's transaction could allow ConAgra to simply make a run for the private-label business. A ConAgra spokeswoman wasn't immediately available to comment on Ralcorp's plans.

As Ralcorp's foray with Post Foods has shown, operating a significant branded food business alongside a private-label operations can be difficult. Both categories compete for a limited amount of shelf space, and the gains of private label often come at the expense of branded players.

Ralcorp said the transaction allows each business to focus on its brands. "The margin and cash flow profile of Post Foods is quite different than Ralcorp's private-brand business, and there are many unique development opportunities for this business," said Ralcorp Chairman William P. Stiritz.

Meanwhile, the company separately offered a weak outlook for the fiscal third quarter and trimmed its full-year view due to lower-than-expected branded cereal volumes and a jump in raw materials for private-branded offerings that out paced price increases.

Ralcorp's shares slid 5.6% to $81.75 in after-hours trading, below the $86 a share offered by ConAgra. Meanwhile, ConAgra's shares dropped 3.5% to $25.34.

Ralcorp intends to complete the separation in four to six months, in which Post Foods--the manufacturer of Honey Bunches of Oats, Grape-Nuts and Post Raisin Bran cereals--will be spun off to Ralcorp shareholders in a tax-free transaction.

Following completion of the transaction, Ralcorp will continue to trade on the New York Stock Exchange. Post Foods is expected to be listed on the NYSE as well.

Upon completion of the planned separation, Stiritz will serve as chairman of Post Foods while J. Patrick Mulcahy, vice chairman, will serve as chairman of Ralcorp. Co-Chief Executive and President Dave Skarie will retire at the end of the year, while the other co-CEO and president, Kevin Hunt, will assume sole responsibility for those roles upon completion of the separation.

The company has also established a search committee to seek candidates for the role of CEO of Post Foods.

Ralcorp sees adjusted third-quarter earnings of $1.13 to $1.18 a share, below the $1.37 estimate of analysts polled by Thomson Reuters.

For the year, the company now sees adjusted earnings of $5.20 to $5.35 a share, down from its May estimate of $5.45 to $5.55. Ralcorp reiterated that it expects recently accelerated cost-cutting efforts to result in an additional $80 million to $100 million in operating profit over the next three fiscal years.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

(John Kell contributed to this article.)

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