2nd UPDATE: Ralcorp To Spin Off Post Foods Unit, Offers Weak View
July 14 2011 - 8:22PM
Dow Jones News
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.
Later Thursday, ConAgra indicated it wasn't swaying from its
proposal to buy the company, saying that it had seen Ralcorp's
announcement and that its proposed takeover continued to be in the
best interests of Ralcorp's shareholders.
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.
ConAgra reiterated its interest last month but 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.
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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