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Ralcorp Spurns ConAgra’s Sweetened $4.9 Billion Takeover Bid

Ralcorp Rejects ConAgra Proposal
A box of Ralcorp Holdings Inc.'s Post brand Honey Bunches of Oats cereal sits on a shelf at Garden of Eden Grocery Store in New York. Photographer: JB Reed/ Bloomberg

Ralcorp Holdings Inc., the maker of Raisin Bran and Grape-Nuts cereal, spurned a $4.9 billion offer from ConAgra Foods Inc. and adopted a shareholder rights plan to bar its suitor from gaining control of its shares.

The $86-a-share bid isn’t in the best interest of investors, the St. Louis-based company said today in a statement. Ralcorp, the biggest U.S. maker of store-brand foods, is embracing a so-called “poison pill” strategy, a takeover defense that typically gives shareholders the right to buy new stock at a discount.

ConAgra’s offer, its second unsolicited bid in less than two months, is 32 percent more than Ralcorp’s closing price before the initial overture. Buying Ralcorp, which generated about $3 billion last year from selling foods under retailers’ own brands, would help ConAgra Chief Executive Officer Gary Rodkin almost quadruple private-label sales.

“This transaction is certainly moving to the next step,” Chris Growe, an analyst for Stifel Nicolaus & Co. in St. Louis, said today in a report. “ConAgra can continue to comfortably push its offer higher.” Ralcorp had snubbed a March offer of $82 a share, ConAgra said in a statement earlier today.

The deal would be “a very good opportunity for shareholders of both companies,” Teresa Paulsen, a spokeswoman for ConAgra, said in an e-mail after Ralcorp’s latest rejection. She declined to comment on ConAgra’s next move. Matt Pudlowski, a spokesman for Ralcorp, didn’t return calls seeking comment.

Willing Seller?

Growe, who recommends holding ConAgra for now, said Ralcorp may become a “willing seller” with a higher bid. Ralcorp rose $4.06, or 4.9 percent, to $87.39 at 4 p.m. in New York Stock Exchange composite trading. Earlier the shares rose as high as $90.20, or 4.9 percent more than ConAgra’s offer. Omaha, Nebraska-based ConAgra advanced 76 cents to $25.51.

ConAgra’s offer is 10.6 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. The multiple is less than the 13 times Kraft Foods Inc. paid for Cadbury Plc last year and more than the 6 private-equity firm KKR & Co. recently paid for Del Monte Foods Co.

There have been more than 300 food-company takeovers globally in the past year, according to data compiled by Bloomberg. In the 22 deals where data are available, bidders paid a median of about 8 times ebitda.

Companies worldwide have proposed $833 billion of mergers and acquisitions so far in 2011, on pace for $2.45 trillion this year, a 10 percent increase over the $2.23 trillion of deals last year. They struck $678 billion of transactions during the same period last year.

Worldwide M&A

ConAgra’s focus on store-brand products may signal a strategy change for Rodkin, who joined ConAgra in 2005 and once said that developing name-brand items was the company’s top priority. Ralcorp’s only nationally branded products are the Post line of cereals, which includes Honey Bunches of Oats.

“This is not a shift,” Rodkin said in a phone interview. “We are committed to brands, but we do believe that private label, which has been growing nicely over the last couple years, will continue to grow. We can do both.”

Rodkin said he started talking to his board last year about expanding the company’s store-brand business, which operates out of Naperville, Illinois, and has annual sales of about $850 million.

“We have difficulty seeing why ConAgra, which has been emphasizing its branded consumer portfolio, would want such extensive store-brand exposure,” Terry Bivens, an analyst at JPMorgan Chase & Co., said in a note to clients today. The New York-based analyst rates ConAgra’s shares “neutral.”


The purchase would lead to about $250 million in annual cost savings by the third year after closing, ConAgra said today. ConAgra is also “confident” the transaction will improve its current sales and earnings per share growth rates.

“We believe that an acquisition of Ralcorp would make strategic sense for ConAgra, despite potential difficulties of combining a private label company with a branded company,” Eric Serotta, an analyst at Wells Fargo Securities, said in a note to clients today. The New York-based analyst rates the shares “outperform.”

Centerview Partners LLP and Bank of America Corp. are advising ConAgra, which plans to assume $2.5 billion in debt as part of the deal. ConAgra will use cash on hand and plans to issue debt to fund a transaction. The company reported $883 million in cash and near cash as of Feb. 27. Adding “some equity” to the proposed cash bid is a possibility, Rodkin said.

ConAgra Performance

In March, ConAgra reported third-quarter profit of 50 cents a share on an adjusted basis, beating the 46-cent average of analysts surveyed by Bloomberg. At the time, Rodkin said the company, which also makes Healthy Choice frozen meals, is ready to start looking “a bit more aggressively” at acquisitions.

ConAgra is the biggest supplier of store-brand cereal bars for retailers like Wal-Mart Stores Inc., Rodkin said in February. In April 2010, ConAgra acquired Elan Nutrition LLC for an undisclosed sum to bulk up its private-label snack bar business.

Ralcorp began in 1994 through the spinoff of Ralston Purina Co.’s cereals and baby foods businesses. About a quarter of Ralcorp’s sales come from Post cereals, bought from Kraft Foods Inc. for $2.7 billion in 2008. Ralcorp added to its private-label pasta business with the $1.2 billion purchase of the American Italian Pasta Co. last year.


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.

Some companies in the store-brand industry are consolidating. Treehouse Foods Inc., a maker of store-brand soups and sauces, has acquired more than five store-brand manufacturers since 2006.

Apollo Global Management LLC also has sought an investment in Ralcorp, a person familiar with the talks said April 29. Earlier this year, New York-based Apollo, led by Leon Black, made an unsuccessful bid for Sara Lee Corp., the maker of Ball Park hot dogs. Apollo has worked with former consumer executive C. Dean Metropoulos to find investments in the industry.

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