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ConAgra Set to Eat Ralcorp Poison as Price Rises 27%: Real M&A

ConAgra Foods Inc. corporate headquarters in Omaha, Nebraska, U.S. Photographer: Eric Francis/Bloomberg
ConAgra Foods Inc. corporate headquarters in Omaha, Nebraska, U.S. Photographer: Eric Francis/Bloomberg

Traders have never been more confident they can secure a higher offer from ConAgra Foods Inc. in its attempt to take over Ralcorp Holdings Inc., the biggest U.S. maker of store-brand foods.

Ralcorp, which has increased by more than $1 billion in value in the past two weeks on takeover speculation, climbed 5.2 percent above ConAgra’s unsolicited all-cash proposal of $86 a share. The gap is the widest since the Omaha, Nebraska-based maker of Chef Boyardee pasta and Slim Jim meat sticks raised its original offer last week, indicating that merger arbitragers are betting ConAgra will be forced to boost its $4.9 billion bid, according to data compiled by Bloomberg.

While Ralcorp has spurned both of ConAgra’s offers and adopted a “poison pill” strategy to prevent hostile takeovers, ConAgra Chief Executive Officer Gary Rodkin signaled that he intends to take his proposal directly to shareholders. Buying St. Louis-based Ralcorp would hand Rodkin, who has rewarded owners with a gain of less than 4 percent since becoming CEO in 2005, control of a company that almost tripled its profit in the past five years. Ralcorp may be worth $104 a share, 27 percent more than ConAgra’s initial bid, BMO Capital Markets said.

“It seems ConAgra wants it pretty badly,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York. “It’s trading above the offer, so people’s perception is that there is going to be a higher offer. People feel pretty comfortable that ConAgra is going to go the distance.”

Equity Value

Teresa Paulsen, a spokeswoman for ConAgra, declined to comment. Ralcorp’s Matt Pudlowski didn’t return a telephone call seeking comment.

Shares of Ralcorp closed at $90.49 on May 11, the highest level since 1997. Ralcorp as it exists today was created that year after selling some businesses to General Mills Inc. Ralcorp’s equity value has risen 27 percent to $5 billion since April 29, when the shares jumped on takeover speculation.

The $4.49 gap between Ralcorp’s price on May 11 and ConAgra’s offer was the biggest since the bid was announced on May 4. ConAgra boosted the price after saying Ralcorp rejected its March proposal for $82 in cash and stock. Ralcorp turned down ConAgra a second time, saying the latest offer was “not in the best interests of shareholders.”

To defend itself, Ralcorp enacted a shareholder rights plan to fend off unwanted suitors. ConAgra countered by saying two days later that it hired proxy solicitor Innisfree, a sign that Rodkin may pursue a hostile takeover.

‘Two Dogs’

“We’ve heard high $90s would make them happy, but of course they’ll want to grab every bit of market cap for themselves and their current shareholders,” said Michael Vogelzang, chief investment officer at Boston Advisors LLC, which manages $1.8 billion and owned ConAgra and Ralcorp shares as of March. “That’s the dog bone between the two dogs.”

A deal may help boost ConAgra’s shares. Since Rodkin became CEO on Oct. 1, 2005, ConAgra has gained 3.1 percent, versus a 38 percent advance for consumer staples stocks in the Standard & Poor’s 500 Index. ConAgra returned 27 percent with dividends, less than half the total for its rivals in the same span.

Buying Ralcorp, which generated about $3 billion last year selling foods under retailers’ own brands, would help Rodkin almost quadruple private-label sales. He would also get Post cereals, which accounted for a quarter of Ralcorp’s revenue.

A total of $88.5 billion in store-brand products were sold last year, 1.8 percent more than 2009, according to the Private Label Manufacturers Association, a New York-based industry group. Sales of name-brand goods fell 1.1 percent.

Brand-Name Competition

The acquisition would lead to about $250 million in annual cost savings by the third year after closing, ConAgra said. It’s also “confident” the deal will improve its sales and earnings growth rates. Without Ralcorp, ConAgra’s sales will increase 2 percent this year, while revenue at Ralcorp is projected to rise 17 percent, analysts’ estimates compiled by Bloomberg show.

Earnings at Ralcorp may also grow faster than ConAgra this year, as ConAgra faces competition from more popular brand-name products such as Pittsburgh-based H.J. Heinz Co.’s ketchup, which contends with ConAgra’s Hunt’s line.

“They are eager to try to grow their business and they’ve had trouble doing that,” said Jack Russo, a St. Louis-based analyst at Edward Jones. “ConAgra’s brands are not first-tier brands. Perhaps they just felt like they were never going to be a premier branded-foods company and so maybe this change of direction and change of course was a right move for them.”

Credit Ratings

Including net debt, ConAgra’s offer is valued at about $7 billion, or 10.6 times Ralcorp’s $662 million of earnings before interest, taxes, depreciation and amortization in the 12 months ended December, data compiled by Bloomberg show. Takeovers of food companies greater than $500 million in the last five years were valued at a median of 11 times Ebitda.

Dave Novosel, a credit analyst at Gimme Credit LLC in Chicago, says that Rodkin’s goal to maintain ConAgra’s investment-grade rating may constrain his ability to increase the per-share offer of $86 without adding stock.

The company is rated Baa2 by Moody’s Investors Service, and BBB by both S&P and Fitch Ratings, according to data compiled by Bloomberg. The ratings are two levels above junk.

“Even with the existing offer ConAgra is borderline between investment grade and non-investment grade,” Novosel said. “ConAgra would be in danger of losing investment grade. If ConAgra makes a higher offer and it is cash, then their chances of going non-investment grade are even higher.”

If ConAgra wants to close the deal for Ralcorp, it may still need to boost its price, according Scott Rostan, a former M&A banker at Merrill Lynch & Co. and president of Training The Street, which trains new hires at firms from Zurich-based Credit Suisse Group AG to Blackstone Group LP of New York.

“Ralcorp is taking a ‘just say no’ defense tactic and initiated a poison pill,” he said. “They’re digging their heels in. The market is making a bet that there’s going to be a bump and that either another bidder will come in and raise the price or that ConAgra will be forced to raise it to get the deal done. It’s probably more likely to be the latter.”

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