The unsolicited cash offer is $86 a share, 32% more than Ralcorp’s closing price before the initial bid, ConAgra said. ConAgra first sent a letter of interest in March offering $82, a bid St. Louis-based Ralcorp snubbed.
Purchasing Ralcorp would allow ConAgra chief executive officer Gary Rodkin to almost quadruple sales of store-brand foods, a market that has grown as some cash-strapped shoppers trade down. Ralcorp, split from Ralston Purina Co. almost 20 years ago, generated about $3 billion last year from selling cereals, cookies and pasta under retailers’ own brands.
“This transaction is certainly moving to the next step,” Chris Growe, an analyst for Stifel Nicolaus & Co. in St. Louis, said in a report. “ConAgra can continue to comfortably push its offer higher.”
“Though our board of directors is disappointed by your response and your refusal to meet with us or to discuss this opportunity, we have reaffirmed our strong belief in the strategic, operational and financial merits of the proposed transaction,” Rodkin said in a letter to Ralcorp.
ConAgra’s offer is slightly less than the $5 billion, or $90 a share, estimated last week by Erin Lash, an equity analyst for Morningstar Inc., based in Chicago. The company may be worth 7-9 times Ralcorp’s 2010 earnings before interest, taxes, depreciation and amortization, she said. The multiple is less than the 13 times Kraft Foods Inc. paid for Cadbury Plc last year and more than the six private-equity firm KKR & Co. recently paid for Del Monte Foods Co., she said.
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 eight times earnings before taxes, depreciation and amortization.
Companies worldwide have proposed $833 billion of mergers and acquisitions so far in 2011, on pace for $2.45 trillion this year, a 10% increase over the $2.23 trillion of deals last year. They struck $678 billion of transactions during the same period last year.
ConAgra’s focus on store-brand products may signal a shift 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 Raisin Bran and Honey Bunches of Oats.
The purchase would lead to about $250 million in annual cost savings by the third year after closing, ConAgra said. ConAgra is also “confident” the transaction will improve its current sales and earnings per share growth rates.
“The deal makes sense and the price ConAgra would be paying wouldn’t be that astronomical,” Marco Elser, a partner at AdviCorp Plc, a London-based investment banking firm, said in a telephone interview. “Distribution is the name of the game today. The savings would be going straight to the bottom line.”
ConAgra, which is getting financial advice from Centerview Partners, also plans to assume $2.5 billion in debt. 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 February 27.
Analysts note buying Ralcorp also would help ConAgra become less reliant on commodity businesses such as its flour-milling operations. Those are part of its commercial foods unit, whose sales fell about 8% last year.
From the May 4, 2011, Prepared Foods' Daily News.