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How Long Has Ralcorp Deal Been In Works?

November 27, 2012
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Speculation over the motivating factors behind Ralcorp’s decision to be acquired by ConAgra traces the genesis of the transaction from this summer to as far back as last fall.

In the past year, Ralcorp has announced it would spin off its Post cereal unit, then went through three months of financial restatements and delays that ended with an additional $54 million charge posted for the transaction. This summer, Corvex Management LP announced that it took a 5 percent stake in Ralcorp and was pressing the company for a sale, merger, or acquisition to add shareholder value.

In September, Ralcorp announced it would restructure the company, folding its three main food divisions into one center-store unit consisting of cereal, pasta, snacks, sauces, and spreads.

Morningstar analyst Erin Lash said her company believed the push toward revival of talks with ConAgra came squarely from Corvex.

“We suspect that Ralcorp management might have been more open this time around due to pressure from Corvex,” she said. “And so, we think that could’ve prompted their willingness to go through with this.”

Still, she said the announcement came out of the blue.

“I wasn’t expecting this announcement this morning, especially given the unfriendly reception ConAgra received from Ralcorp before,” she said.

Jim Wisner, president of Wisner Marketing Group, said he didn’t expect this deal either, but that something seemed to be in the works.

“The way it was announced, sort of a fait accompli, this had to be going on for a couple months,” he said. “If you go back and look at it, ConAgra paid less than they said they wanted to at first, they got it without Post – which they didn’t want, I think – and (Ralcorp) recouped some of the money from Post.

“The reorganization was intriguing. It looked like, do you really want to do that? They had a couple divisions that were apples and oranges, so it was curious why they’d move in that direction. I suspect it was because they were working on this deal.”

In a statement in the news release announcing the purchase, Ralcorp CEO Kevin Hunt talked first about the shareholder value that would be created for Ralcorp with the deal. Later, he said the two companies “were a great fit.”

That also seemed significant, Wisner said, “because the argument in the past was that it was not what was best for the company in the long term. We’ve worked with Ralcorp before, and given the culture at Ralcorp and the culture at ConAgra, I kinda believe that.”

Wisner said he thought Ralcorp was positioning itself for growth rather than a sale.

“You saw a company aggressively picking up additional businesses as recently as this summer, they figured out the Post thing didn’t work the way they hoped to, and they were dealing with that,” he said. “There was something clicking around in the back of my mind as a result of the way the reorganization happened. I was more inclined to think it was them making a major acquisition or them initiating a merger with someone else. That was my best guess on the thing.”

Jim Hertal, managing partner at Willard Bishop, said Ralcorp may have decided the time was right to maximize its value with a sale to ConAgra.

“If you just look at the growth in value of Ralcorp over the last few years, if you just tracked it back eight or 10 years I think it’s been pretty spectacular growth,” he said. “In every deal there is motivation to take some of that off the table. This might have just been a more straight forward acquisition at that time.”

Carol Spieckerman, president of retail strategy firm Newmarketbuilders, said the creation of the largest private label food producer in North America was important.

"It's certainly a noteworthy mega deal in terms of one giant swallowing another giant," she said.

TAKEAWAYS FROM THE DEAL

Hertal said the acquisition was a major statement on the importance of private label in the grocery industry.

“I think the real news in this is beyond the transaction, one of the premier branded companies, ConAgra, is known more for the branded side, but now looks like they will consummate a large deal and be more invested in private brands,” he said. “I think this is really a recognition that private label is here to stay.”

Spieckerman agreed, saying the deal spoke to the need to complement national brand business with private brand business, since no retailer was looking at the two sides of the business in isolation.

"I think most companies think of private brands as an either-or proposition, but they should coexist," she said. "Private brands and national brand portfolios ideally belong together."

Lash said that the emphasis toward private label could help ConAgra’s branded work as well.

“We’ve long believed that ConAgra’s second- and third-tier brands lack equity and pricing to their peers, and we think that with this, ConAgra will be able to benefit as the consumer looks for lower-priced products,” she said. “We also believe it will enhance relations with retailers who are looking for those options.”

But one of the potential obstacles facing a merger will be how the companies are able to integrate their work, Wisner said.

“Ultimately it is determined primarily by the acquiring company,” he said, “what their management style is, how well they are willing to utilize and integrate the strengths of the company they acquire. I’ve seen some mergers go through, Perrigo acquired some that rolled in there kinda smooth, KE and Tree of Life, all things considered, went fairly smooth. And I’ve seen some others along the way, often what happens is the acquiring company buys them as a piece of property and regards them as such and folds them into how they do things and goes about its business.

“Will that change Ralcorp? ConAgra’s style is not as open, perhaps, as it was at Ralcorp. Does Ralcorp over time become the rest of ConAgra? I think that would be a shame. The visceral understanding of the store brand industry that Ralcorp has, you hope it doesn’t get lost.”

The best solution, Wisner said, would be allowing Ralcorp to become the private label division operating within ConAgra, able to fold the private label businesses of the companies together while operating side-by-side with the branded divisions.

“To my mind that would be the best way to go,” he said. “It’s very difficult to wear both hats. I’ve seen very few people able to do it. You really wind up with something that’s not as good as it can be with either one, or one takes precedence over the other. If I were them, I’d go in two different directions, much like people separate foodservice from their retail business, because they really are two difference animals.”

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