Ralcorp rejects ConAgra's sweetened $4.9 billion bid
BANGALORE/NEW YORK (Reuters) - ConAgra Foods Inc (CAG.N) may have to sweeten its bid for Ralcorp Holdings Inc RAH.N again after the low-priced food maker rejected the company's $4.9 billion takeover offer.
Ralcorp, which owns Post cereals and makes foods that supermarkets brand as their own, also adopted a poison pill provision on Wednesday to fend off ConAgra's advances.
ConAgra, the maker of Slim Jim meat snacks and Healthy Choice meals, offered to buy Ralcorp for $86 a share in cash, up from an earlier cash-and-stock offer of $82 a share it made in March. The company is betting that lower prices will remain attractive to U.S. consumers long after the economy recovers.
After the rejection, ConAgra said it remained "very enthusiastic" about a deal.
"We are very interested in discussions with Ralcorp. We continue to believe this is a very good opportunity for shareholders of both companies," a ConAgra spokeswoman said.
Ralcorp shares closed at $87.39 on the New York Stock Exchange, after touching $90.20, their highest level since being spun off from Ralston Purina in 1994. ConAgra shares closed up 3 percent at $25.51, their highest since March 2010.
Given low interest rates, Standard & Poor's equity analyst Tom Graves estimates that ConAgra may be willing to go as high as $90 per share, valuing Ralcorp at about 16 times 2011 earnings estimates, in line with other food stocks.
Janney Capital Markets analyst Jonathan Feeney said it was "very wise" of ConAgra to raise its bid. "There would be plenty left on the table at $100 (per share)," Feeney said.
Ralcorp may also attract private equity interest, analysts have said. One source familiar with the situation, who was not authorized to speak to the media, said Apollo Global Management (APO.N) and others may be interested.
ConAgra estimates that the proposed deal would add to its profits within one year of closing and save about $250 million a year by the third year, as it would wring out costs in areas such as sourcing and transportation -- very important at a time when food companies are struggling with higher costs for everything from wheat to packaging to fuel.
Ralcorp's strength in "private label" foods, or those that bear a retailer's label, gives it a leg up in an economic downturn when consumers save money by buying cheaper brands.
Store-branded foods, such as those at Whole Foods Market Inc WFMI.O and Trader Joe's, are gaining permanent cachet with consumers, said ConAgra Chief Executive Gary Rodkin.
"Value is here to stay. Growth in private label is not going to go away when the economy starts to turn around," Rodkin told Reuters. "We believe food purchasing will get better as the economy goes, but we think private label is going to be an important piece of that."
Combining ConAgra's $850 million private-label business with Ralcorp would result in about $4 billion in annual revenue from store brands, and account for a quarter of ConAgra's. They account for 7 percent now.
"It's a bet on private label, but it's a bet on branded as well. There's no ifs, ands or buts," Rodkin said.
Manufacturers of private label goods do not spend as much as their branded peers on advertising or promotions, which is how they can charge less. But differences in economies and marketing means that doing both can be difficult.
"I think it's very hard to run a private label and branded business under the same house," said John Bryant, chief executive of Ralcorp rival Kellogg Co (K.N), in an interview. Kellogg posted disappointing profit on Wednesday, in part because of higher ingredient costs.
JP Morgan analyst Terry Bivens said he had "difficulty seeing why ConAgra, which has been emphasizing its branded consumer portfolio, would want such extensive store brand exposure."
Ralcorp said late on Sunday it rejected an unsolicited offer from a third party in March.
The new bid represents a 3 percent premium to Ralcorp's close on Tuesday and is a fifth more than the price before the April 29 report by CNBC that ConAgra had bid for Ralcorp.
Centerview and Bank of America were advisers to ConAgra.
(Reporting by Mihir Dalal, Nivedita Bhattacharjee and Abhishek Takle in Bangalore, Martinne Geller in New York and Jessica Hall in Philadelphia; Editing by Sriraj Kalluvila, Brad Dorfman and Robert MacMillan)
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