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ConAgra is primed for growth with its deal for Ralcorp

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Posted: Wednesday, November 28, 2012 12:33 pm

A planned $5 billion acquisition by ConAgra Foods dwarfs the size of the company's other recent purchases and establishes the Omaha firm as North America's biggest manufacturer of store-brand packaged foods such as cereals, crackers and condiments.

The acquisition of St. Louis-based Ralcorp Holdings Inc., announced Tuesday, will more than quadruple ConAgra's private-label sales to $4.5 billion. The combined company will have 36,000 workers and total sales of about $18 billion, said ConAgra CEO Gary Rodkin.

Ralcorp will give ConAgra more access to retailers such as 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 the restaurant chain as well, he said.

The deal caps a year of acquisitions for ConAgra, which makes Hunt's, Banquet, Chef Boyardee and Marie Callender's, among its long list of brands. Recent buys have included National Pretzel, Bertolli frozen meals and Del Monte Canada.

But all the acquisitions of the past two years total just over $1 billion.

The purchase of Ralcorp is in line with ConAgra's stated plans to expand its private-label business but was "anything but expected" because three previous attempts to buy Ralcorp had been turned down, one analyst said.

Erin Lash of Morningstar Inc. said the deal "seems like a great strategic fit for ConAgra," which has been working to expand its store-brand business amid lower sales of branded foods.

"The firm may be able to benefit as consumers opt for lower-priced products and retailers increasingly tout value offerings," Lash said.

Another analyst, Jonathan Feeney at Janney Capital Markets, said he had expected the deal to happen eventually, calling it "consistent with common sense." He said even though Ralcorp spun off its best-known brand, Post cereals, since ConAgra first sought a deal, Ralcorp is now better aligned with the strategy Rodkin has laid out for growth.

ConAgra said it plans to finance the acquisition mostly with available cash, existing credit and new borrowing.

The deal could affect ConAgra's credit rating, at least in the short term. Moody's is reviewing ConAgra's ratings but said any downgrade would most likely be limited to one notch. ConAgra said it is committed to maintaining an investment-grade credit rating. The company said paying down debt quickly will be a priority and that it expects to maintain a $1-per-share annual dividend.

Private-label brands now account for 28 percent of all food and drink consumed in the U.S., up from 20 percent about a decade ago, according to market researcher the NPD Group.

Supermarkets and drugstores have been working to improve the image of their store brands as a way to control the rising costs of national name brands. Private brands don't come burdened with the advertising costs carried by most national brands, but are often produced and distributed on a similar scale. Retailers are increasingly turning to such products for their attractive profit margins, while customers flock to them for their affordability.

"Clearly, consumer dynamics have changed since the recession, and we expect growth in private-label food to continue to outpace growth in branded food," Rodkin said.

Ralcorp Food Group makes pasta, cereal, snacks, sauces, peanut butter, jelly and mayonnaise, and Ralcorp Frozen Bakery Products makes frozen waffles, pancakes and dough.

With Ralcorp's products, ConAgra would expect to get 25 percent of sales from private label, 43 percent from branded food and 32 percent from commercial and food service, Rodkin said.

There is a danger that companies that offer both branded and private-label operations risk cannibalizing their brands. That may not be an issue for ConAgra because its brands -- Reddi-wip, Chef Boyardee, Orville Redenbacher's, to name a few -- do not carry its name and stand on their own.

Instead, the move "should jump-start their growth rate because they now will have something else to sell that retailers want," said Jack Russo, a stock analyst with Edward Jones.

The agreement ends a 20-month pursuit by Rodkin, who withdrew a $94-a-share takeover offer in September 2011 after it was rejected. Ralcorp had spurned previous offers of $86 and $82 a share.

Lash said Ralcorp was more open to a deal this time because of pressure from "activist investor" Corvex Management, the company's biggest shareholder with a 5 percent stake.

ConAgra will pay Ralcorp Holdings Inc. stockholders $90 per share, a 28 percent premium to its Monday closing price of $70.23. The companies put the transaction's value at about $6.8 billion when debt is included.

The deal, which was unanimously approved by both companies' boards but still needs Ralcorp shareholder approval, is expected to close by March 31.

ConAgra said the purchase should have a modest benefit on its fiscal 2013 financial results. The company still anticipates fiscal 2013 earnings in a range of $2.03 to $2.06 per share, excluding the Ralcorp deal.

This report includes material from the Associated Press, Los Angeles Times, New York Times and Bloomberg News.

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