Shares in Ralcorp Holdings have rocketed since the company was linked to a takeover approach by an unnamed suitor – rumoured to be ConAgra Foods – with the possibility mooted that a financial buyer could also make a move for the US cereal-to-pasta group. While Ralcorp has knocked back the offer, speculation is currently centred on the possibility that further interest in the company could emerge. Katy Humphries reports.

It wasn’t long ago that Ralcorp was on the acquisition trail. In 2008, the group completed a transformational US$2.6bn deal that saw it take on the Post cereal business from Kraft Foods. The acquisition expanded Ralcorp’s branded business and moved it away from being primarily a private-label manufacturer.

Having digested Post, Ralcorp has since continued its offensive with the completion of a number of smaller-scale buys in recent years – such as its acquisitions of American Italian Pasta Co (AIPC) and Sepp’s Gourmet Foods.

However, the news late last week that linked Ralcorp to a takeover approach from a trade buyer recast the Honey Bunches maker in the role of prey rather than predator.

On Friday (29 April) Ralcorp shares jumped by around 12% after CNBC reported that ConAgra Foods had made a written approach to buy the company. Shares in the group rose to a high of $84.60 following the report, to settle at around $83.10 in morning trade in New York today.

It is believed that the initial offer valued at around $84 per share.

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Ralcorp has since confirmed that it received an unsolicited bid in March, which it subsequently rejected. In a statement released to the New York Stock Exchange late on Sunday, Ralcorp said it never met any third party to discuss selling the company and denied that it is in ongoing negotiations over the possibility.

“The board of directors of Ralcorp has a high level of confidence in the management team and in the future prospects of Ralcorp,” chairman William Stiritz said.

In a bid to back up its assertion that management can – and is – effectively delivering on the group’s strategic goals and creating shareholder value, Ralcorp also released its expectation-beating second-quarter results ahead of schedule.

In the second quarter to 31 March, Ralcorp booked earnings of $83.3m, or $1.43 per share, up 78% and well ahead of consensus estimates of $1.24 per share. The company said that its strong performance – which saw sales up 22% year-on-year – was largely driven by gains from its AIPC acquisition.

While Ralcorp said that it expects input costs to rise by around $200m in the year, it said that this would be offset by price hikes and issued full-year earnings guidance of $5.45-$5.55. The group also detailed plans to reduce costs by $80-100m in the fiscal.

Nevertheless, the company’s rebuttal of the takeover speculation alongside its positive earnings outlook has done little to stop tongues wagging.

Indeed, in a note to investors, BB&T Capital Markets analysts suggest that Ralcorp’s rejection of the bid does not necessarily imply an unwillingness to sell.

“We believe the rejection of the offer was likely a function of the board’s view that the price offered was too low. We wonder whether Ralcorp’s decision to issue guidance and detail its internal $80-$100m cost savings plan, which we welcome, was an effort to fully and clearly communicate the true earnings power of the company in order to assure a fair price in the case of a sale. In our view, a potential sale is not off the table,” the analysts wrote today.

Likewise, it does not seem entirely far-fetched to suggest that ConAgra could come back with a higher offer for Ralcorp, given the strategically compelling logic behind a link-up between the two groups.

According to Barclays Capital analyst Andre Lazar, the potential acquisition of Ralcorp would make a lot of sense for ConAgra, as it would add branded scale, boost investors’ view of its non-branded business, add to EPS and “set ConAgra on a path where it can further consolidate both private label and branded assets”.

“We see this news as potential evidence that ConAgra is moving more towards using its cash on accretive deals – to become more of a consolidator – rather than solely for reinvestment behind a more mature brand portfolio,” Lazar wrotes in a note to investors.

Meanwhile, Ralcorp could also attract interest from other quarters, Morningstar analyst Erin Lash suggests. Financial buyers could be attracted to the group given its “reasonable” scale, “moderate” leverage and the potential to improve free cash-flow generation, Lash claims.

Indeed, private-equity firm Apollo Global Management is now also rumoured to be pursuing Ralcorp.

“While we’re not changing our fair value estimate in light of this news, we believe Ralcorp is now in play as a potential acquisition target,” Lash says. “Based on our initial estimates, Ralcorp might be able to garner a 7-9 times EBITDA multiple. This would equate to a total purchase price of around $5bn, or about $90 per share.”

So, with Ralcorp attracting the attention of trade and non-trade groups alike, it is possible that further consolidation in the US food sector could be on the cards.