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May 9, 2011

Best bits: ConAgra’s Ralcorp ambitions; Sainsbury’s faces questions

Last week's column featured news of takeover interest in Ralcorp Holdings, the US food group behind a swathe of private-label products and the Post cereals brand - and since then, ConAgra Foods has declared its hand.

By Dean Best

Last week’s column featured news of takeover interest in Ralcorp Holdings, the US food group behind a swathe of private-label products and the Post cereals brand.

Ralcorp had confirmed that it had received and rejected a proposal made in March but it did not name the suitor. There had been speculation in the US that ConAgra Foods, a company with its own private-label interests but more renowned for US brands like Marie Callender’s ready meals and Chef Boyardee pasta, had made the approach.

A day later, ConAgra went public with its interest in Ralcorp and launched a US$4.9bn hostile takeover bid. Ralcorp quickly turned it down, arguing the $86-a-share bid was “not in the best interests of shareholders”.

That is, however, unlikely to be the end of the matter. ConAgra sees the acquisition of Ralcorp as an effective way of expanding its own presence in the fledgling – but growing – US private-label sector. Own label is, at least compared to Europe, a fledgling business across the Atlantic. But ConAgra sees growth in the sector; over the past five years, it says, private label has seen its share of US supermarket sales rise from 16.4% to 18.9%. A deal for Ralcorp would, so the theory goes, give ConAgra a stronger presence in a growing industry – the challenges of running brands and private label (and the recent falling sales from parts of the Post portfolio).

Despite Ralcorp’s insistence that it wants to stay independent, there is a feeling on Wall Street that ConAgra will prevail. There has been some reported private-equity interest in Ralcorp but the synergy benefit of such a deal would be less than that from a transaction with ConAgra.

That said, could Ralcorp’s board dig in its heels? Sanford Bernstein’s Alexia Howard is one US analyst who believes that ConAgra will succeed in buying Ralcorp, although, she acknowledges, “not without a fight”. Howard argues the “most likely outcome” is that ConAgra will convince Ralcorp’s board with an offer “a little ahead of where Ralcorp’s stock is trading today” – on the day (5 May) of Howard’s comments, Ralcorp’s shares were trading at $87.

However, Howard does not rule out that Ralcorp, which has been pretty acquisitive in the last year, could make another move and buy a business to defend its position.

This week, Sainsbury’s, the UK’s number three grocer, reports its annual results, with the numbers closely watched for signs of how the country’s food retail sector is dealing with the continuing weak consumer confidence here.

Sainsbury’s, partly through to its own savvy use of private label, confounded some industry watchers and rode out the recession well. The retailer is also part-way through a period of rapid expansion. In 2009, Sainsbury’s said it wanted to increase its space by 15% by the end of 2011.

Nonetheless, despite Sainsbury’s proving the sceptics wrong during the downturn, there are some questions about the retailer’s recent performance. In March, Sainsbury’s reported slowing fourth-quarter sales, with like-for-like sales up 1%. Excluding the impact of inflation and VAT, like-for-like sales were likely to have been down 2%.

At the time, chief executive Justin King said Sainsbury’s recent performance had been ahead of the market. However, there have been signs that UK consumers are once again turning to discount retailers like Aldi and Lidl as they look to save money. And, with Tesco and Asda competing fiercely on price, analysts are questioning how much Sainsbury’s would have had to – and will have to in the weeks ahead – invest in margins to keep consumers shopping at their stores.

Sanford Bernstein retail analyst Christopher Hogbin says Sainsbury’s has the lowest operating margin among listed UK food retailers and therefore its earnings are “more sensitive” to movements in margin. Nonetheless, analysts at MF Global, previewing Sainsbury’s results today, suggest that the customer loyalty that the retailer was said to enjoy is “more fragile than we first thought”.

What’s more, today’s surprise announcement that former CFO and current development director Darren Shapland is to leave Sainsbury’s after six years will also see King face questions about the company’s growth strategy. Shapland, for instance, was seen to be leading Sainsbury’s possible international expansion. Sainsbury’s and King are set for a tricky day this coming Wednesday.

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