story by Duane D. Stanford
ConAgra Foods Inc. won the backing of Ralcorp Holdings Inc. for a takeover with a $5 billion bid, ending a 20-month standoff after Ralcorp shareholders pressured the maker of private brand foods to stop opposing the deal.
Buying Ralcorp, which sells foods under retailers’ own brands, will more than quadruple ConAgra’s private-label sales to $4.5 billion. The transaction will create a company with sales of about $18 billion, providing leverage to boost prices in a way ConAgra’s stable of second- and third-tier brands haven’t, said Erin Lash, an analyst with Chicago-based Morningstar Inc.
“It is a good strategic fit for ConAgra,” Lash said today (Nov. 27). “It could enhance their relationships with retailers and it extends their portfolio beyond their lackluster brands.”
The offer of $90 a share is 28% more than Ralcorp’s closing price yesterday, the companies said today in a statement. Including debt, the transaction is valued at $6.8 billion and is expected to be completed in March.
Ralcorp, based in St. Louis, surged 26% to $88.80 at the close in New York, its biggest gain since at least 1997. ConAgra, the Omaha, Neb.-based maker of Chef Boyardee and Healthy Choice meals, increased 4.7% to $29.63.
Corvex Management LP, the hedge fund founded by Keith Meister, disclosed in August that it had acquired a stake in Ralcorp and was interested in reviving ConAgra’s bid, said a person familiar with the matter at the time. Corvex, based in New York, said in a filing that month that the “status quo is unacceptable” and Ralcorp has had “several serious execution issues.”
The agreement ends a pursuit that began in March 2011 by Conagra CEO Gary Rodkin, who withdrew a $94-a-share takeover offer in September 2011 after it was rejected. Ralcorp, which sells cookies and pasta under retailers’ own brands, chose instead to spinoff its Post Foods unit to focus on the private-label goods. Ralcorp had spurned previous offers of $86 and $82 a share.
“This really recognizes that private label is going to be probably the biggest growth vector in the food industry for years to come,” Rodkin said today in an interview, adding that today’s deal price is “apples to oranges” compared to the previous offers to buy Ralcorp because of the Post spinoff and other companies Ralcorp has bought and sold.
PRIVATE LABEL STRENGTH
Private label represents 18% of sales in the packaged food market in the U.S. and has had growth “in excess of the overall food market over time,” the companies said today.
Ralcorp will give ConAgra more access to retailers including Trader Joe’s Co. and Costco Wholesale Corp., Rodkin said. ConAgra’s Lamb Weston food service unit is a major supplier of frozen french fries to McDonald’s Corp., and Ralcorp’s portfolio of frozen bakery products will enable ConAgra to sell breakfast offerings to restaurant chain as well, Rodkin said.
Rodkin said he doesn’t expect competing bidders or antitrust concerns, given the fragmented nature of the private-label industry and the low amount of product overlap between the companies.
Since December, ConAgra has acquired four companies including Unilever’s North American frozen meals unit for $265 million.
Today’s transaction is the largest takeover in the U.S. diversified food sector in at least a decade, with ConAgra paying about 11 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with the median of 10.5 times Ebitda in a survey of 13 comparable deals over the past 10 years.
ConAgra, the maker of Orville Redenbacher’s popcorn and Banquet frozen meals, said the deal will have a “modest benefit” to its fiscal 2013 financial results. The company said it expects about $225 million of cost savings on an annual basis by the fourth full fiscal year after the completion of the transaction.
In May, Ralcorp said it would restate results for fiscal 2011 and first quarter of 2012 after understating an impairment charge related to the spinoff of Post, which occurred in February.
ConAgra will significantly reduce share repurchases, not to zero, executives said during a conference call today. It also will issue as much as $350 million of equity and is “fully committed to its investment grade credit rating,” it said in the statement.
Centerview Partners LLC and Bank of America Corp. provided financial advice to ConAgra, while Davis Polk & Wardwell LLP offered legal counsel. Barclays Plc and Goldman Sachs Group Inc. served as advisers to Ralcorp, with Wachtell Lipton Rosen & Katz giving legal advice.