Bloomberg News

Ralcorp Costing Investors $1 Billion Opposing ConAgra: Real M&A

September 14, 2011

Sept. 15 (Bloomberg) -- Ralcorp Holdings Inc.’s board risks costing shareholders a billion dollars if it walks away from ConAgra Foods Inc.’s third takeover offer in favor of splitting up the company.

Ralcorp plunged to $79.11 yesterday after ConAgra said it will withdraw the $94-a-share proposal if the cereal maker won’t start negotiations by Sept. 19. The premium of 19 percent is now higher than every pending all-cash U.S. deal of more than $1 billion, according to data compiled by Bloomberg. While Ralcorp’s Post Foods and private-label goods may only be worth a combined $86 a share in an upcoming separation, ConAgra may be willing to pay $104 to secure a deal, said BMO Capital Markets.

The maker of Chef Boyardee pasta and Orville Redenbacher’s popcorn is pushing for talks after St. Louis-based Ralcorp rejected its advances, adopted a poison pill and said splitting in two will “unlock significant value” for shareholders. ConAgra, which began its pursuit at $82 a share in March, is now valuing the biggest U.S. maker of store-brand foods at $7.3 billion including net debt. Ralcorp still fell 7.1 percent yesterday as traders who profit from mergers and acquisitions abandoned bets after pushing the stock as high as $90.51 in May.

“It’s put up or shut up time for Ralcorp,” Jack Russo, an analyst for Edward Jones & Co. in St. Louis, said in a telephone interview. “Clearly the board of directors at Ralcorp is under the gun. They may have to be more specific on how they’re going to take care of their own shareholders if they don’t accept an offer.”

Calls from Shareholders

Some Ralcorp investors spoke with two board members, David W. Kemper and Jonathan E. Baum, pressing them to hold talks with ConAgra and see how high the company was willing to bid, said people familiar with the matter, who declined to be named because the discussions were private.

James Golden, an outside spokesman for Ralcorp, declined to comment regarding the board members’ discussions with investors and the potential valuation in a takeover versus a spinoff. A telephone message left at Ralcorp Chairman William Stiritz’s office wasn’t returned. Teresa Paulsen, a spokeswoman for Omaha, Nebraska-based ConAgra, declined to comment beyond the company’s Sept. 13 statement.

“ConAgra Foods has heard from many of Ralcorp’s shareholders who are urging Ralcorp to enter into negotiations,” the company said in the statement. “Ralcorp has been unwilling to engage in discussions of any nature with ConAgra.”

‘Deal Isn’t Dead’

ConAgra’s current offer is a starting point for negotiations, which may result in an offer of as much as $104 a share, estimates Amit Sharma, a New York-based analyst at BMO Capital. His projected acquisition price range of $94 to $104 a share is based on past deals in the food and beverage industry and a sum-of-the-parts analysis for Ralcorp.

According to Sharma’s analysis, Post Foods may be worth $14 a share and the private-label food business may be valued at $72 a share, based on peer companies’ projected 2012 multiples relative to earnings before interest, taxes, depreciation and amortization.

“The deal isn’t dead,” Sharma said in a phone interview. “If the company is worth $86 on a sum-of-the-parts analysis, in the next 12 months taking the deal is a better option.”

A bid of $104 a share would hand shareholders $992 million, or 21 percent, more than the value that would be created in the company’s proposed split, based on Sharma’s estimates and data compiled by Bloomberg. The $94-a-share offer is already 9.3 percent higher than the estimated value in a breakup.

Fruity Pebbles

“ConAgra is offering a pretty fair price,” said Russo of Edward Jones. “It’s hard to do any better than an all-cash offer. If Ralcorp is going to break up the company, then you’ve got a long process with that and questions over what Post is going to be valued at.”

Ralcorp plans to separate its private-label foods division from the Post cereal brands, including Honey Bunches of Oats and Fruity Pebbles, in a tax-free spinoff that doesn’t require shareholder approval. The transaction will “unlock significant value” for investors, Ralcorp Chairman Stiritz said in a July 14 statement. The company estimated the spinoff would be completed within four to six months.

Stiritz, 77, will become the chairman of Post Foods, and Vice Chairman J. Patrick Mulcahy will be the chairman of the surviving Ralcorp company, which will consist of the private labels. Co-Chief Executive Officer Dave Skarie will retire Dec. 31, and his counterpart Kevin Hunt will be CEO of Ralcorp after the separation.

Sum of Parts

Post Foods may be worth almost $18 a share after a spinoff, while the remaining Ralcorp business may be valued at about $64, based on publicly traded peers, Andrew Lazar, an analyst at Barclays Plc in New York, wrote in a report yesterday. While Lazar’s sum-of-the-parts projects the businesses should be valued at about $82 a share combined, BB&T Capital Markets’ Heather Jones estimates a valuation of $90 a share.

Ralcorp spurned the $94-a-share offer from ConAgra on Aug. 12 after turning down earlier offers of $86 and $82 a share. ConAgra said in the Sept. 13 statement that it would withdraw the bid, which values Ralcorp at $5.2 billion plus $2.1 billion in net debt, if it doesn’t enter negotiations by 5 p.m. New York time on Sept. 19.

The all-cash offer “provides present value in excess of what Ralcorp can achieve on its own, including through its announced spin-off plans,” ConAgra said in the statement.

“If you look at the press release ConAgra put out, it said Ralcorp has one week to start negotiations -- not to accept,” said BMO Capital’s Sharma. “$94 is a pretty good price to get them to start talking.”

Higher Bid Unlikely

ConAgra said it’s only interested in acquiring the entire company and will pursue other opportunities if Ralcorp refuses to negotiate.

Given the deadline announcement, ConAgra is not very likely to “materially” raise its bid, David Driscoll, an analyst with Citigroup Inc. in New York, wrote in a Sept. 13 research report.

ConAgra “believes it is offering full value to RAH shareholders above what the company is worth in its current structure or after a spin-off,” Driscoll wrote.

If ConAgra wants to keep its investment-grade credit rating, it’s probably capped at offering $100 a share unless it chooses to issue stock as part of the terms, Alexia Howard, an analyst for Sanford C. Bernstein & Co. in New York, wrote in a Sept. 12 note to clients before ConAgra set the deadline. The food company is rated Baa2 by Moody’s Investors Service and BBB by Standard & Poor’s.

Biggest Premium

Ralcorp has fallen 13 percent since reaching a record high of $90.51 on May 18. The shares dropped $6.03 to $79.11 yesterday. ConAgra’s bid now offers a 19 percent gain for shareholders if the deal closes at $94, the biggest current premium of any pending all-cash takeover in the U.S. greater than $1 billion, according to data compiled by Bloomberg.

“We’d like to see it get done,” Michael Vogelzang, who oversees $1.9 billion including ConAgra and Ralcorp shares as chief investment officer of Boston Advisors LLC, said in a telephone interview. “Ralcorp can’t be happy with the stock down as much as it is. It will be interesting to see what it’s going to take Ralcorp to make the decision to effectively sell their business.”

--With assistance from Devin Banerjee and Michael Tsang in New York. Editors: Sarah Rabil, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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