--ConAgra agrees to buy Ralcorp for $90 a share, or $4.95
billion, after a 20-month courtship
--Deal would create the second-largest U.S. packaged-food
company by sales with $18 billion
--Ralcorp shares up 26%
(Adds comments from interview with ConAgra chief executive and
background on private-label industry throughout.)
By Paul Ziobro
ConAgra Foods Inc. (CAG) is poised to become the second-largest
U.S. packaged-food company by sales after agreeing to buy
private-label food maker Ralcorp Holdings Inc. (RAH) for about
$4.95 billion, concluding a courtship that began more than 20
months ago.
The deal also positions ConAgra to be the largest maker of
private-label foods in the U.S., a part of the packaged-food
industry that ConAgra believes will continue growing as retailers
devote more attention to their in-house brands and frugality
becomes embedded in the consumer psyche.
ConAgra will more than quadruple its size in the private-label
space, even as signs emerge that growth is slowing as name-brand
products defend their turf through lower prices and new
products.
ConAgra agreed to pay $90 a share in cash for Ralcorp, a 28%
premium to Monday's closing price. Including the assumption of
Ralcorp's debt, the total value of the deal comes to about $6.8
billion.
Ralcorp shares rose 26.3% to $88.70 in recent trading, while
ConAgra added $4.3% to $29.52.
The offer is just below ConAgra's bid of $94 a share that
Ralcorp ignored, and ConAgra ultimately withdrew, last year.
Ralcorp has changed a bit since then, though, having spun off its
Post cereal business, Post Holdings Inc. (POST), as well as made
some acquisitions, like paying $545 million for a
refrigerated-dough business.
The combination of ConAgra and Ralcorp will create a company
with $18 billion in annual sales, trailing only Kraft Foods Group
Inc. (KRFT), with $19 billion, in the U.S. packaged-food industry,
which is struggling to find ways to move the needle on sales. One
area in which ConAgra Chief Executive Gary Rodkin hopes to find
that growth is private-label items, which retailers sell under
their own labels, usually at bargain prices.
Private-label foods currently make up nearly 22% of
packaged-food sales in the U.S., according to Nielsen data, up from
18.4% in 2007. While private-label foods picked up market share
significantly at the beginning of the economic downturn in 2008,
national brands have started to make up ground. Research firm
SymphonyIRI Group Inc. earlier this month said private-label foods
have lost share in the U.S. two years in a row and argued that the
products have hit a "proverbial glass ceiling."
Mr. Rodkin said that while private-label foods may have slowed
as a whole, growth is occurring in certain categories, like snacks,
and at retailers like Whole Foods Market Inc. (WFM), Costco
Wholesale Corp. (COST) and privately held Trader Joe's, which
devote extra attention to their store brands. Two of Ralcorp's key
customers are Costco and Trader Joe's, Mr. Rodkin said, putting
ConAgra in a good position to capitalize.
"There's always some bumps in the road, if you will, but if you
look at the long term, it's a pretty good growth rate," Mr. Rodkin
said in an interview.
Mr. Rodkin also said he thinks the U.S. food industry will
continue to migrate toward more private-label sales, much like in
other developed countries. In Switzerland, for instance, 44% of
food sales are in private label. "We're going to become more like
that, rather than less like that," Mr. Rodkin said.
The sale price ultimately provides some vindication to Ralcorp,
which was criticized by shareholders for not coming to the
bargaining table when ConAgra first started making overtures. When
accounting for the stock split that occurred before the Post
spinoff, the combined value of Ralcorp's acquisition agreement
Tuesday and the Post spinoff comes to $107.05 a share.
Pressure on Ralcorp intensified more recently when Corvex
Management LP--a hedge fund headed by Keith Meister, a protege of
famed activist investor Carl Icahn--in August publicly called for
Ralcorp to consider selling itself. Mr. Meister, who declined to
comment Tuesday, ultimately secured a seat on Ralcorp's board, a
strong sign that Ralcorp was willing to consider the proposals.
The deal is expected to close by March 31. ConAgra said it
expects the deal to have only a "modest benefit" on fiscal 2013.
The company said it expects to achieve about $225 million of cost
synergies on an annual basis by the fourth full fiscal year after
the deal closes, and the deal should boost earnings in the first
year.
Ralcorp will be by far the largest acquisition in a recent spree
by ConAgra, which has been on the hunt for deals in categories
where it already sells goods, in the private-label space and
internationally. Mr. Rodkin said ConAgra will focus on paying down
debt over the next 18 to 24 months, and any large acquisitions are
likely off the table during that time.
Write to Paul Ziobro at paul.ziobro@dowjones.com
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