ConAgra's Bid for Ralcorp Could Turn Hostile

May 9, 2011

Although the board of directors of Ralcorp Holdings Inc. twice rejected acquisition bids from ConAgra Foods last week and adopted a “poison pill” to fend off takeover, some analysts predict ConAgra will take the offer directly to shareholders.

Ralcorp logo ConAgra’s hiring of proxy solicitor Innisfree is one sign that the consumer packaged goods company could be planning a more hostile approach or is a move to pressure the Ralcorp board to accept the rejected $4.9 billion offer. A proxy solicitor is a specialist firm that helps an acquiring company identify and communicate with key shareholders, often a sign of a hostile takeover to come.

However several analysts, including BMO Capital Markets, believe ConAgra’s offer is too low. “ConAgra’s hostile bid is unlikely to be successful at the current offer price of $86. Given Ralcorp's comprehensive anti-takeover measures and expectations of significant accretion to ConAgra’s earnings at the current offer price (ConAgra can afford to pay more), we believe that hiring of a proxy solicitor is just a precursor to a likely higher bid.”

According to BMO, Ralcorp is worth between $94 and $104 per share “based on our sum-of-the-parts analysis of Ralcorp's major businesses and analysis of strategic and LBO transactions in the food and beverage universe over the past 15 years,” BMO said.

Reaffirming Ralcorp’s independence and superior return to investors, the company Chairman William Stiritz, said: "Ralcorp, as an independent company, has a proven track record of delivering superior results and shareholder value, having delivered total shareholder returns of 418 percent over the past 10 years and 114 percent over the past five years. We are confident that Ralcorp has a strategic plan and a proven management team that will continue to generate significant shareholder value in the future. Our board of directors affirms its commitment to Ralcorp as an independent company."

After rejecting ConAgra’s bid, Ralcorp’s board also adopted a shareholder rights plan (or poison pill), “which is intended to enable all of the company's shareholders to realize the long-term value of their investment in the company, and reduce the likelihood that any person or group would gain control of the company by open market accumulation or otherwise without paying a control premium for all shares.”

ConAgra’s acquisition of Ralcorp would give it immediate positioning in private label grocery categories. Like many CPG companies, ConAgra is finding it increasingly difficult to compete against private labels – short of deep discounting and promotions -- which since the recession have gained considerably momentum and popularity among shoppers.

SBD Views: ConAgra’s pursuit of Ralcorp potentially takes the wave of store brand manufacturer consolidation to a entirely new level. With the existing track record of value creation at Ralcorp, it’s clear there is more growth in store for them as an independent company. As this story unfolds, it will be an interesting one to watch. Stay tuned. -- John Failla for Store Brands Decisions

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Keywords: private label acquisitions

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