News: Ralcorp Takes the Post
It is also a deal that Wall Street has been expecting for months, as Kraft has said it might exit businesses where its growth prospects and market share are relatively weak. While Post makes such classics as Raisin Bran, Grape-Nuts and Fruity Pebbles, it is a slow-growing, number-three player in the cereal business.
The Post deal is a complicated stock transaction, fashioned to avoid the big tax hit implicit in a cash sale. Northfield, Ill., based Kraft will merge its Post operation into St. Louis-based Ralcorp, with Kraft shareholders ending up with a 54% ownership stake in Ralcorp.
Rosenfeld, who took over as CEO in June 2006 amid concerns about Kraft's sluggish growth and profitability, said in a press release the Post deal is "one where everyone wins -- Kraft, Ralcorp, our respective shareholders and employees."
Post's 1,250 employees, most of whom work at four factories, including one in Battle Creek, Mich., will join Ralcorp. Post's marketing unit will continue to be based in New Jersey, while its research operation will remain in Battle Creek, the city where Post was born in the 1890s.
"We view Ralcorp's intention to merge with Kraft's cereal business as a big win for Ralcorp and essentially neutral for Kraft shareholders," Credit Suisse analyst Robert Moskow wrote in a research note.
After the sale, Ralcorp's annual revenues will jump by 50%, and it will get a foothold in the branded cereal business. Heretofore, Ralcorp has been a big player only in private label or store brand cereals.
For Kraft, the deal's potential benefits are more long term, analysts say, allowing the company to focus more on its brands in frozen foods, meats, cookies and cheese.
Post has been growing at a slower clip than rival cereal-makers, losing market share. For the 52 weeks ended October 7, Post had a 14% share behind Kellogg's and General Mills' shares of 34% and 29%, respectively, according to Information Resources Inc.
Kraft is normally number one or number two in whatever market it is in.
Post "is not a core brand, and there is almost no way Kraft could be a market leader in [the cereal] category," said Erin Ashley Smith, a stock analyst at Argus Research. "They would have to invest a lot to get to the same level [as Kellogg and General Mills]," she said.
Greg Warren, an analyst at Morningstar, said Post is "definitely one of the assets I've thought they should sell." The company got a "decent" price for Post, too, he added.
However, Tim Ramey, a stock analyst at D.A. Davidson & Co., said in a research note that the Post deal "destroys" shareholder value. "This deal never should have happened," he wrote.
Ramey argued that Post enjoys operating profit margins of about 27%, compared with Kraft's average of 14.6%. If cereals must go, "where do you draw the line?" he wrote. "Jello? Oscar Mayer? Miracle Whip? We believe Post is far more attractive than those other [Kraft] brands."
Post was born as the Postum Cereal Co. and was eventually rechristened as General Foods. It became part of Kraft when Kraft was merged with General Foods in 1989.
Kraft began looking at "strategic alternatives" for Post during 2007's first quarter, said Lisa Gibbons, a company spokeswoman. By summer, Kraft managers were not the only ones weighing in on Post's future.
Nelson Peltz, an outspoken billionaire investor, bought a stake in Kraft and called for the sale of Post and Kraft's Maxwell House coffee business. Peltz, who controls 2.4% of Kraft's shares, came to an accord with Kraft last week. The company added two Peltz-blessed directors to its board, and Peltz pledged not to launch any campaigns against Kraft.
Kraft has been investing heavily in Maxwell House in recent months and has signaled that any sale of the brand is unlikely, at least in the short-term, analysts say.
Biggest sale in years
The Post deal is Kraft's biggest sale in several years, eclipsing the jettisoning of its sugar confectionary business to Wm. Wrigley Jr. Co. for $1.5 billion. That November 2004 sale included the Altoids and Lifesavers brands.
When the Post deal closes, Kraft shareholders will get at least 30.3 million shares of Ralcorp, while Ralcorp will essentially assume $960 million in Kraft debt. Depending on market conditions prior to the deal's closing, Kraft will determine whether Ralcorp shares will distributed to its shareholders via a "spinoff" or "splitoff."
In a spinoff, Kraft shareholders will retain their Kraft shares and will get a yet-to-be-determined amount of Ralcorp shares. In a splitoff, shareholders would have the opportunity to trade some or all of their Kraft shares for Ralcorp shares that would likely trade at a premium to Ralcorp.'s actual price.
The somewhat confusing deal might have put downward pressure on Kraft's stock Thursday, said Argus' Smith.
From the November 19, 2007, Prepared Foods e-Flash