ConAgra, Ralcorp Deal Dance Ends Up a Win for Investors
Just over year ago, Con Agra was making third unsolicited push to buy Ralcorp, a maker of private label cereals, snacks and condiments for $5.2 billion. After Ralcorp rejected the offer the company instead spun off its Post Cereals (POST) unit in early 2012.
Now ConAgra has agreed to buy Ralcorp for $90 a share in cash, proving that Ralcorp management's refusal to give in to early takeover was a savvy move that's netted longtime shareholders a higher price and a sizeable stake in the strongly performing Post spinoff.
ConAgra's price values the company and its debt at $6.8 billion. Ralcorp shares surged over 26% in early Tuesday trading to $88.83, while ConAgra shares gained nearly 5% to $29.70.
On Tuesday morning, Mario Gabelli, the head of money management firm Gabelli Asset Management and a large Ralcorp shareholder, took to Twitter to celebrate the terms of Tuesday's deal.
Gabelli highlighted ConAgra's $90 a share bid, which is higher that the company's final unsolicited 2011 bid of $86 a share, and the merits of the Post spinoff, which gave investors one Post share for every two Ralcorp shares they owned.
"Deals,deals and more Deals... ConAgra and Ralcorp (RAH) to merge (finally) ...RAH to get $90... One year ago, RAH spun-off POST...patience," wrote Gabelli in a breathless, but optimistic tweet.
In the background of ConAgra's multi-year push for Ralcorp is a bitter fiscal debate that's moved from a summer 2011 debt ceiling standoff to a present fight over a so-called 'fiscal cliff' of budget cuts and tax increases.
Both budget drama's have had real consequences for investors and for corporations looking to map out growth strategies.
After the debt ceiling led to the downgrade of the U.S. government's bond rating by Standard & Poor's , companies retreated from merger and acquisition talks and some like Ralcorp decided to spin off business units, in a move to boost share prices amid an uncertain economic outlook.
While spinoffs were all the rage for the likes of Ralcorp, ConocoPhillips (COP) , Pfizer (PFE) , Tyco (TYC) and Kraft Foods (KFT) in late 2011 and early 2012, Tuesday deal may indicate slimmed down conglomerates are now more viable takeover targets.
Meanwhile, uncertainty over the outcome of the 'fiscal cliff' may make some companies like Ralcorp more amenable to M&A negotiations, after ConAgra's initial offers were unsolicited and rejected in short order.
For ConAgra, Ralcorp's private label foods businesses spanning multiple supermarket aisles will help it become one of the biggest packaged foods companies in the U.S, with $18 billion in annual revenue. ConAgra's acquisitions come at a time when competitors like Kraft, Sara Lee (SLE) and J.M Smuckers (SJM) are in the process of trimming down their operations.