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Ralcorp to Buy American Italian Pasta, Cracker Makers

Ralcorp Holdings Inc., the St. Louis-based producer of Post cereals, agreed to buy American Italian Pasta Co. for about $1.2 billion in cash, to gain control of the biggest maker of dry pasta in North America.

The $53-a-share price is 27 percent more than American Italian’s closing price as of June 18. The purchase will add at least 50 cents a share to earnings in fiscal 2010, Ralcorp said today in a statement.

The “significant” earnings boost a buyer would get from American Italian Pasta leaves open the possibility that a rival bidder may emerge and offer a higher price, said Tim Ramey, an analyst for D.A. Davidson & Co. in Lake Oswego, Oregon.

“This is a fair but not full valuation,” Ramey, who recommends buying American Italian Pasta, wrote today in a note. Davidson owned 17,300 of the company’s shares as of March, a stake of less than 1 percent, according to data compiled by Bloomberg. “We wouldn’t rule out another bidder stepping in,” Ramey said.

Ralcorp dropped $4.89, or 7.9 percent, to $57.28 at 4:15 p.m. in New York Stock Exchange composite trading, the largest decline since November 2008. American Italian, the Kansas City, Missouri-based maker of Mueller’s, jumped $10.93, or 26 percent, to $52.66 in Nasdaq Stock Market trading.

Target Valuation

Ralcorp’s offer values the pasta maker at 7.3 times its 2010 earnings before interest, taxes, depreciation and amortization, Ramey said, and 6.8 times his 2011 earnings estimate using the same measure.

American Italian’s sales topped $600 million last year, with about 80 percent of that coming from customers who sell its pasta through retail channels. Ralcorp is adding generic brands as consumers eat at home more and hunt for bargains to save money.

Ralcorp has purchased more than 20 companies in the past decade, co-Chief Executive Officer Kevin Hunt said on a conference call regarding the acquisition. The company makes cereal and other products for retail chains that sell them under their own store brands. Also called private-label brands, the products often come at a 25 percent discount to national brands because they aren’t as heavily advertised, according to Ralcorp’s website.

American Italian will become a unit of Ralcorp and will report to Hunt, who oversees the snacks, sauces and spreads division. The purchase, which will be funded through existing credit facilities and a new bridge loan, probably will close by Sept. 30, Ralcorp said.

The company also said it bought two Canadian cracker bakeries, North American Baking Ltd. and J.T. Bakeries Inc., for undisclosed sums.

Ralcorp also announced that diluted earnings per share for the third quarter probably will be $1. That compares with the $1.29 average of estimates compiled by Bloomberg.

(Ralcorp held a conference call to discuss the purchase. To access a replay, go to http://www.ralcorp.com)

To contact the reporter on this story: Duane Stanford in Atlanta at Dtanford2@bloomberg.net

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