US food group Ralcorp Holdings has announced three acquisitions it hopes will broaden a business that makes products from cookies and cereal to frozen foods. However, will the largest acquisition, of US pasta supplier American Italian Pasta Co., benefit Ralcorp? Dean Best reports.
What kind of acquisition has Ralcorp Holdings, the US food group behind cereal brand Post, delivered to its shareholders with its deal to buy American Italian Pasta Co.?
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Yesterday (21 June), Ralcorp’s shares slumped more than 7% after the company announced its plan to buy AIPC for US$1.2bn.
Ralcorp also announced two acquisitions in Canada and issued a profit warning for its fiscal third quarter.
The admission that Ralcorp’s earnings in the three months to the end of June would be lower was likely to be a key factor in yesterday’s drop in the company’s share price.
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Ralcorp blamed the profit warning on fierce competition in the US cereals category for affecting its Post branded business and the own-label cereals made by its Ralston Foods division.
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By GlobalDataThe company, which makes products ranging from cookies and crackers to frozen food, only bought the Post business in 2008 but it is an important contributor of the group’s profits.
In the first six months of Ralcorp’s current fiscal year, branded cereals accounted for just under 28% of net sales but almost 46% of segment profits.
Ralcorp’s admission that its products were being hit by competition in the US cereals category – and its subsequent warning that those tough trading conditions would continue – spooked investors, sending its share price falling.
However, the planned acquisition of AIPC has prompted concerns over the pasta firm’s growth prospects.
Ralcorp outlined the growth in the US pasta category and said the sector had seen sales volumes rise by just over 2% in 2009 and dollar sales inch up by less than 1%. Hardly stellar growth.
However, co-CEO and president Kevin Hunt defended the deal, pointed to AIPC’s position in a “growing” private-label category its “quite strong regional brands that have got legs” and the prospects for a “very strong” pipeline of new products focused on health and wellness.
Hunt added that Ralcorp had made over 20 acquisitions in the past decade and he hailed the prospect of adding AIPC to the business. “It’s an extremely strong fit. I can’t think of a stronger acquisition for us.”
Ralcorp also faces concerns that, once the US economy recovers, consumers could switch from pasta to other meals or start to eat out more regularly.
Hunt argued the pasta business was not a cyclical one. “If you look at three to four to five years before the economy had its issues, the pasta category was demonstrating good growth. We can all try and guess how the consumer is going to react [once the economy recovers] but we think it is a good, strong, healthy category.”
However, he added: “We’re not looking for 10-15% growth … we just think the dynamics are very good.”
Ralcorp’s coyness on the synergies it would look to extract from the AIPC deal would have also worried investors.
Ralcorp’s management insisted it could generate synergies from the deal but refused to put a value on the cost savings it expected to make. It did disclose, however, that the pasta firm would operate independently, much in the same way as the Post cereals business acquired from Kraft Foods two years ago.
However, given the problems Ralcorp has had integrating Post into its business, some industry watchers are questioning the company’s ability to absorb more acquisitions.
Erin Swanson, an analyst at Morningstar, acknowledged that the planned acquisitions of AIPC, as well as the two cracker companies in Canada, would give Ralcorp a wider product portfolio but she was cautious about how successfully the company could digest the new additions.
“Although these deals may provide diversification beyond the cereal aisle, which currently accounts for about 50% of the firm’s sales), Ralcorp’s integration record is not spotless,” Swanson told just-food.
“The firm recently faced several hurdles during the integration of Post, despite its extensive acquisition experience. As a result, we are concerned that additional integration obstacles may ensue, particularly given the challenging environment in which Ralcorp is operating.”
And Ralcorp is facing tough trading conditions. While the company’s branded and own-label cereal brands are facing fierce competition in that category, its wider private-label business is battling brands keen to promote to win over consumers still watching their wallets.
Across the store, brand-owners have stepped up their marketing and promotional activity to lure shoppers away from private label and there are concerns that, as consumer confidence slowly grows in the months ahead, own-label suppliers could see sales squeezed.
Hunt, however, played down fears that Ralcorp was being affected by heightened promotional activity across its portfolio and suggested that cereal was its most competitive category.
“We are seeing an increased number of promotions in a number of our categories but, on the other hand, the price gaps [with brands] have stayed constant,” Hunt said. “Given that cereal is a destination category, it is probably the most intense that we’re seeing across our categories.”
Nevertheless, with Post accounting for a significant chunk of Ralcorp’s business, these are worrying times for the business.
Ralcorp’s management may see the acquisition of Canadian cracker firms North American Baking and J.T. Bakeries – and especially of AIPC – as broadening the business. The directors also claimed the deals would add $0.50 to Ralcorp’s diluted earnings per share on a pro-forma basis.
However, given the slow growth seen in pasta, uncertainty over the synergies it will derive from the deal and the ongoing issues in cereal, it is hard, at least right now, to see how much the benefits of Ralcorp’s latest expansion will boost its bottom line.
