Blog: Katy AskewConAgra turns hostile in Ralcorp bid

Katy Askew | 4 May 2011

ConAgra's bid to acquire Ralcorp Holdings took a new turn today (3 May) when, after a failed attempt to open a dialogue with the private label manufacturer's board, the Chef Boyardee and Healthy Choice maker decided to pitch its offer directly to Ralcorp shareholders.

ConAgra has offered US$86 per share for the company and, although this represents quite a premium on Ralcorp's share price before takeover talk pushed it up last week, shares in the group already surpassed this value in morning trade today, rising to $88.05 on the NYSE by noon.

Ralcorp shares have been driven up by speculative investors who are betting that ConAgra will be forced to up its offer. And, according to ConAgra itself, the compelling strategic rationale behind the move could justify an improved price.

Outlining its motivations for the deal, ConAgra said that the combination would result in the formation of the third largest US food group, a powerhouse with iconic brands and - significantly - an extremely strong presence in the fast-growing private label sector.

According to ConAgra, over the past five years private label has grown from 16.4% of sales in the supermarket channel to 18.9%. Perhaps, then, the attempted acquisition of Ralcorp can be viewed as an indication of the strategic emphasis that ConAgra is placing on growing this side of the business: ConAgra already has a decent showing as a private label manufacturer and it seems that the company is backing sustained growth of the private label sector in the US.

Another reason why investors are willing to wager that the hammer will fall on Ralcorp for a higher price is speculation that a financial investor could step in with a counter bid.

Financial buyers could be attracted to the group given its scale, leverage and the potential to improve free cash-flow generation, analysts have suggested. With Apollo Global Management already linked to a possible move, this eventuality does not seem entirely far-fetched. Indeed, Morningstar analyst Erin Lash yesterday suggested that a realistic price for deal realisation would be in the region of $90 per share.

With all these factors at play, we can certainly expect the negotiations between Ralcorp and ConAgra to make headlines for some time to come.



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