Ralcorp Holdings Inc. (RAH), the cereal maker that snubbed offers from ConAgra Foods Inc. (CAG), has explored the sale of the Post cereals division in an attempt to fend off its suitor, said people with knowledge of the matter.
Ralcorp has gone to General Mills Inc. (GIS), PepsiCo Inc., Kellogg Co. (K) and B&G Foods Inc. (BGS) in recent weeks, seeking almost $2 billion for the unit, said the people, who declined to be identified because the negotiations are private. The St. Louis- based company also talked with buyout firms Blackstone Group LP (BX), KKR & Co. and Apollo Global Management LLC, the people said.
There has so far been little interest in Post, the people said. The unit generated about one-fourth of Ralcorp’s $4 billion in 2010 sales with brands like Grape-Nuts and Alpha- Bits. The goal of any sale would be to come up with cash that Ralcorp can return to shareholders, the people said.
“With the proceeds from Post, Ralcorp could maybe issue a special dividend,” Jack Russo, an analyst at Edward Jones & Co., said in an interview. “Maybe it would be enough to placate Ralcorp’s shareholders.” The St. Louis-based analyst recommends holding ConAgra shares and does not cover Ralcorp.
If no sale of Post occurs, Ralcorp is likely to rely on its poison pill, staggered board and takeover laws in Missouri to prevent an acquisition by ConAgra, said a person familiar with the matter. Ralcorp could also accelerate further cost-cutting efforts to persuade shareholders of improved profitability, the person said.
Ralcorp fell 50 cents to $90.01 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 38 percent this year.
Jim Golden, a spokesman for Ralcorp, declined to comment, as did representatives at General Mills, PepsiCo, Kellogg, B&G, KKR, Blackstone and Apollo.
Ralcorp Chairman William Stiritz has already rebuffed two overtures from ConAgra, which has signaled it may pursue a hostile bid. Ralcorp’s base in Missouri may make an offer harder for ConAgra, since takeover rules are more stringent there than in other states. The terms of Ralcorp’s directors expire at different times, making it impossible for a potential buyer to replace the whole board in one go. The company also requires a buyer to get approval from at least 85 percent of shareholders.
One stumbling block to a sale of the Post unit may be that Ralcorp wants a transaction that would limit the tax implications of any deal, said the people. When Ralcorp bought Post from Kraft Foods Inc. in 2008, the division was spun off from Kraft and merged into its buyer. Ralcorp inherited a low tax basis for Post, meaning it would have a large tax liability if it got too much cash for the business, the people said. That tax basis is $500 million to $800 million, said a person familiar with the specifics of the Kraft-Ralcorp sale.
Any sale to Kellogg or General Mills, the two biggest U.S. cereal makers, could draw antitrust scrutiny, the people said.
Ralcorp has explored various options for Post since ConAgra’s approach, including mostly stock deals with other food companies and so-called sponsored spins to private equity, the people said. In a sponsored spin, Ralcorp would spin out Post to a buyout firm in return for a pre-arranged investment by the private-equity fund. The company has also looked at selling Post to a smaller food company in a Reverse Morris Trust, where Ralcorp shareholders would own a majority of the smaller company, the people said.
Ralcorp rejected a $4.9 billion takeover offer from ConAgra on May 4, its second snub of the Omaha, Nebraska-based foodmaker. ConAgra first contacted Ralcorp in late February and Ralcorp began exploring a potential sale of Post soon after, people familiar with the matter said. At the time Ralcorp shares traded around $64.
Last year the Post division was Ralcorp’s worst-performing, hurt by surging costs for ingredients like wheat and escalating competition for budget-minded shoppers. Post’s profit margins are the widest among Ralcorp’s businesses, according to the company. Still profit declined 12 percent to $221 million last year as Post discounted many of its cereals.
Ralcorp, also the biggest maker of store-brand foods in the U.S., said this month that ConAgra’s latest bid, of $86 a share in cash, wasn’t in the best interests of shareholders. The company adopted a so-called poison pill strategy to prevent its suitor, the maker of Chef Boyardee pasta and Healthy Choice frozen meals, from buying shares without paying a premium.
ConAgra Chief Executive Officer Gary Rodkin is courting Ralcorp to expand the company’s store-brand food business, which operates out of Naperville, Illinois, and has annual sales of about $850 million. ConAgra is the biggest supplier of store- brand cereal bars for retailers like Wal-Mart Stores Inc., a product that Ralcorp also makes.
Heather Jones, an analyst at BB&T Capital Markets, said in a May 17 note that a ConAgra-Ralcorp deal “makes strategic sense” because of generic product overlaps. ConAgra also has a grain-milling business that could help supply Ralcorp’s grain- based products, according to Eric Serotta, analyst at Wells Fargo Securities.
ConAgra’s pursuit of Ralcorp comes as retailers of all stripes are stocking more private-label products to appeal to cash-strapped consumers. Supervalu Inc. (SVU), owner of the Sav-A-Lot discount chain, said this month it wants to boost the percentage of its sales from store brands by one percentage point in each of the next three years.
Total sales of store-brand products increased 1.8 percent to $88.5 billion in 2010, according to the Private Label Manufacturers Association, a New York-based industry group. Sales of branded goods fell 1.1 percent to $419.2 billion. From 2006 to 2010, store-brand items increased their share of units sold in U.S. retailers from 20.2 percent to 21.8 percent.
“At least this deal, even if it does not work, shows that ConAgra is willing to shake things up a little bit and grow the company,” Russo, the Edward Jones analyst, said.
Centerview Partners LLP and Bank of America Corp. are advising ConAgra, which plans to fund a purchase with cash and debt. ConAgra also has hired proxy solicitor Innisfree, signaling that it may pursue a hostile bid. Credit Suisse Group AG is advising Ralcorp.
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