Three times ConAgra Foods made offers for Ralcorp Holdings and three times its fellow US food group refused to even hold talks on a potential sale. This week, ConAgra withdrew its final bid, leaving industry watchers to ask what lies ahead for the two companies. Sam Webb reports.
In a move that baffled both industry watchers and its own shareholders, Ralcorp Holdings steadfastly refused to speak to ConAgra Foods about its fellow US food group’s wish buy the company.
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Over seven months, ConAgra tabled three separate bids to buy Ralcorp and each time the private-label food maker rejected its larger rival without holding talks. On Monday (19 September) ConAgra withdrew its final US$94-a-share offer after a deadline it set Ralcorp to hold discussions expired without any negotiations.
Ralcorp stated its determination to stay independent and stick to its plan of splitting itself in two. The move would create two companies – one focusing on its private-label operations and the other centred on branded cereal arm Post Foods. The company insisted the split would create more value for its shareholders than a sale to ConAgra. However, some investors are not happy with the company’s conduct.
Legal firm Brower Piven has started a class action lawsuit against Ralcorp on behalf of shareholders on the grounds that the food maker’s board “repeatedly and unreasonably refused to even discuss a potential transaction with ConAgra in spite of numerous premium offers for all of the outstanding company shares”.
Questions over the board’s behaviour are not limited to shareholders – analysts have also been scratching their heads.
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By GlobalData“ConAgra is a bigger company with relationships with retailers and a brand distribution network. It could have been an essential positive [for Ralcorp],” Erin Lash, senior equity analyst at Morningstar, tells just-food. “We don’t believe Ralcorp’s spin-off of Post Foods is a value-enhancing initiative for investors.”
An analyst note released by BB&T Capital Markets Equity Research this week concurred. It said: “We are disappointed with Ralcorp’s decision and have difficulty comprehending how it intends to create value that exceeds ConAgra’s offer in a timely manner.”
Nevertheless, there are some in the investment community that believes Ralcorp was right to turn down ConAgra. Alton Stump, an analyst at Longbow Research, told the St Louis Post-Dispatch that he thinks Ralcorp had good reason to reject the takeover bids.
Stump said Ralcorp was “finally getting back on track” with its private-label operations, pointing to the company’s recent acquisition of Sara Lee’s refrigerated dough business.
Moreover, he added the split would allow the company to focus on its respective areas. “The addition of Post cereals not only put Ralcorp in direct competition with General Mills and Kellogg, but it also took the company’s focus away from its private-label business, which has been its main area of expertise,” he said.
So what’s next for Ralcorp? How can it prove the naysayers wrong? Lash says it’s “business as usual” for Ralcorp, which must now ensure that this was the right decision by building business quickly. It may be aided in this aim by the current “stagflationary” environment in the US.
She said: “Overall, in a soft consumer spending environment, Ralcorp has benefited from consumer trade-down to lower-priced products, which is generating trial that may not have occurred otherwise, and as branded firms increase prices to offset rising commodity costs, value-conscious consumers may seek out private-label offerings, potentially boosting Ralcorp’s sales volume.”
Sanford Bernstein analyst Alexia Howard agrees that Ralcorp should have at least heard ConAgra out, but failing that, believe splitting the business is a step in the right direction as it is hard to manage both private-label and branded cereals.
Howard did, however, say the move was “more a matter of rectifying past choices than an opportunity to create substantial shareholder value”.
So now we turn to ConAgra, which this week, after withdrawing its bid for Ralcorp, reaffirmed its dedication to expansion through acquisition.
Lash is not convinced that ConAgra’s products have the strength to thrive against established competitors. She says ConAgra’s portfolio includes many “second- and third-tier brands”, which has left it struggling to convince retailers that its brands deserve shelf space.
Then there’s the issue of higher raw material costs, which have been a “persistent headwind”, she says. “While ConAgra is increasing prices on its products to offset current cost pressures, we aren’t convinced these pricing actions will have the intended effects of accelerating sales growth and margin improvement.”
Lash thinks ConAgra will buy one of Ralcorp’s competitors, such as TreeHouse Foods, in the near future. Both ConAgra and Ralcorp have stated their intention to acquire more private label businesses.
However, ConAgra is likely to have “more ammunition”, according to Howard, highlighting the fact that it was able to get a letter of high confidence from Merrill Lynch in its ability to raise US$5.2bn for an all-cash bid for Ralcorp.
The recession and now slow recovery have seen US consumers look to private label for value. Own-label accounts for an increasing proportion of US food sales and the sector, which has seen a number of major M&A deals in recent years, could be set for more. And ConAgra and Ralcorp will be vying for a slice of the action.
