Tags: ConAgra | ralcorp | Growth

Spurned ConAgra Looks Beyond Ralcorp for Growth

Monday, 19 Sep 2011 12:39 PM

ConAgra Foods Inc. called off its months-long courtship of Ralcorp Holdings Inc. after the maker of Post cereals and store-branded foods failed to agree to talks by a Monday deadline it had set.

"While we are disappointed in Ralcorp's response, we will continue to pursue other growth opportunities," a ConAgra spokeswoman said in an email.

ConAgra, which makes Chef Boyardee pasta, Healthy Choice meals and Slim Jim meat snacks, is pursuing growth "both organically and through acquisitions," the spokeswoman said. She declined to comment on specific possible acquisitions.

Analysts have mentioned Treehouse Foods Inc as an alternative to Ralcorp. Both companies produce lower-cost foods that supermarkets brand as their own. Treehouse could not immediately be reached for comment.

Morningstar analyst Erin Lash said ConAgra would likely continue to try to build out its private label business, saying that its portfolio of second- and third-tier brands lacks the pricing power of its peers.

Last week, ConAgra had said it would give up its pursuit of Ralcorp unless the company entered into negotiations by Monday.

Ralcorp had already rejected ConAgra's sweetened $94-a-share bid last month, and said it planned to separate its Post brand cereals unit from its mainly private-label business to create two pure-play companies.

ConAgra first offered to buy Ralcorp for $82 a share in March and increased that offer to $86 a share in May.

Ralcorp shares fell $1.29, or 1.7 percent, to $74.90 in late morning trading on the New York Stock Exchange, nearly $20 per share below the latest ConAgra offer price.

ConAgra shares were down 2.3 percent at $23.39.

Ralcorp said it would continue with its separation plan, but for now, shareholders are left with a stock that is trading 20 percent below what ConAgra was offering.

"I'm quite disappointed," said Rebecca Scheuneman, assistant portfolio manager at Forester Capital Management, which owns 22,200 Ralcorp shares. "I thought that if Ralcorp's board did reject this final offer from ConAgra that at least they would offer shareholders further explanation as to why they think the $94 bid is insufficient and possibly release some more numbers about the value they expect to generate from the split."

Morningstar's Lash estimates that the split is likely to destroy value.

"For shareholders to break even on the deal, Post would need to garner 9.5 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which seems rich for a third-tier brand in a highly competitive category," Lash said.

Furthermore, spinning off the Post business will ultimately limit the long-term profitability of the remaining Ralcorp, Lash said, since private-label sales inherently carry lower margins.

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