TEXT-S&P puts ConAgra Foods ratings on watch negative

Tue Nov 27, 2012 3:54pm EST

Overview
     -- U.S.-based ConAgra Foods Inc. announced it will be acquiring
Ralcorp Holdings Inc. (BBB-/Negative/--) for approximately $90 per share
plus the assumption of debt for an enterprise value of roughly $6.8 billion.
     -- We believe the proposed acquisition would meaningfully increase 
ConAgra's debt obligations and weaken its credit protection measures.
     -- We placed all our ratings on ConAgra Foods Inc. on CreditWatch with 
negative implications. Concurrently, we affirmed Ralcorp Holdings Inc.'s 
'BBB-' corporate credit rating. We will review the outlook on Ralcorp upon the 
close of the transaction and resolution of ConAgra's CreditWatch listing. 
     -- We placed Ralcorp Holdings Inc.'s issue-level ratings on CreditWatch 
with negative implications.

Rating Action
On Nov. 27, 2012, Standard & Poor's Ratings Services placed its 'BBB' long 
term corporate credit rating, 'A-2' short term and commercial paper, and all 
issue-level debt ratings on Omaha, Neb.-based ConAgra Foods Inc. on 
CreditWatch with negative implications, meaning that we could lower or affirm 
the ratings following the completion of our review. 

At the same time, Standard & Poor's placed Ralcorp Holdings Inc.'s issue-level 
ratings on CreditWatch with negative implications, meaning that we could lower 
or affirm the ratings following the completion of our review. Ralcorp's 'BBB-' 
corporate credit rating is affirmed. The outlook on the corporate credit 
rating is negative.

We estimate ConAgra had about $4.1 billion of lease and pension- adjusted debt 
outstanding at Aug. 26, 2012. As of June 30, 2012, we estimate that Ralcorp 
had approximately $2.1 billion adjusted debt outstanding.

Rationale
ConAgra's CreditWatch negative listing follows its announcement that it will 
be acquiring Ralcorp for about $6.8 billion, funded primarily with a 
combination of cash, existing credit facilities, new debt, and up to $350 
million of new equity. ConAgra management stated it intends to prioritize its 
cash flow to apply to deleveraging, maintain its annual dividend of $1.00 per 
share, and will significantly reduce its share repurchases for a period of 
time. Management also estimates cost synergies from the acquisition of roughly 
$225 million to be fully realized in four years. We recognize that ConAgra 
will increase its scale, gain synergy opportunities, and increase its 
currently limited presence in the growing private label segment as a result of 
this acquisition. Although our assessment of ConAgra's business risk profile 
remains 'satisfactory' factoring in the Ralcorp acquisition, we could consider 
revising our business risk profile to 'strong' over the intermediate term 
after the company successfully integrates Ralcorp and executes its private 
label growth strategy.

However, we believe a meaningfully debt-financed transaction would weaken 
ConAgra's credit protection measures below current levels; specifically, we 
estimate the ratio of lease- and pension-adjusted total debt to EBITDA would 
increase to the 4x area and funds from operations to total debt will decline 
to the high teens or low 20% area as compared to about 2.1x and 32.5%, 
respectively, for the 12 months ended Aug. 26, 2012. We had expected ConAgra 
to maintain credit protection metrics more in line with the company's current 
'intermediate' financial risk profile, in order to maintain the current 
ratings and outlook given our assessment of its 'satisfactory' business risk 
profile, and had previously stated that we would revise the outlook to 
negative or lower the rating if ConAgra's leverage increases over 3x .As a 
result, we would expect to lower ConAgra's corporate credit rating by one 
notch to 'BBB-' if its acquisition of Ralcorp proceeds as per current plans.

In addition, we would expect to lower ConAgra's issue-level ratings by at 
least one notch if we lower the corporate credit rating to 'BBB-'. However, we 
would also review ConAgra's issue-level ratings for potential structural 
subordination once more information becomes available on the acquisition 
financing, as well as the allocation of assets, liabilities, and cash flow 
among the entities in the post-acquisition organizational structure. 

The affirmation of Ralcorp's corporate credit rating is based on our 
expectation that we would lower ConAgra's corporate credit rating by one 
notch, and that Ralcorp's corporate credit rating would reflect our assessment 
of ConAgra's corporate credit rating following the acquisition. However, the 
CreditWatch negative placement of Ralcorp's issue-level ratings indicates that 
we could either lower or affirm the ratings following the completion of our 
review of ConAgra's corporate credit rating and possible structural 
subordination of its issue-level ratings. We would also equalize the outlook 
for Ralcorp with the outlook we assign to ConAgra upon completion of the 
CreditWatch listing. In the event that ConAgra refinances Ralcorp's debt, we 
would withdraw all the ratings on Ralcorp.

CreditWatch
We will resolve these CreditWatch listings for both companies following our 
review of the financial impact of the transaction on ConAgra's financial risk 
profile over the next two years, as well as its ability to restore credit 
metrics to those more in line with our benchmarks during this time period. 
Upon completion of our review, the corporate credit rating for ConAgra will 
likely be lowered by one notch if the transaction proceeds as currently 
contemplated with largely debt financing, and the issue-level ratings will 
likely be lowered by at least one notch, yet could be lowered further 
depending upon the outcome of our review of potential structural subordination 
following the acquisition. The issue-level ratings for Ralcorp could 
potentially be lowered or affirmed. Ratings for Ralcorp could also be 
withdrawn in the event that this debt is repaid.

Alternate contact for Jeff Burian: (1) 973-255-7807.

Related Criteria And Research
     -- Corporate Ratings Criteria 2008, April 15, 2008 
     -- Key Credit Factors: Criteria for Rating The Global Branded Nondurable 
Consumer Products Industry, April 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 

Ratings List
Ratings Placed on CreditWatch
                                        To                 From
ConAgra Foods Inc.
 Corporate Credit Rating                BBB/Watch Neg/A-2  BBB/Stable/A-2

ConAgra Foods Inc.
 Senior Unsecured                       BBB/Watch Neg      BBB
 Subordinated                           BBB-/Watch Neg     BBB-
 Commercial Paper                       A-2/Watch Neg      A-2

ConAgra Holdings (Australia) Pty. Ltd.
 Commercial Paper                       A-2/Watch Neg      A-2

Ratings Affirmed

Ralcorp Holdings Inc.
 Corporate Credit Rating                BBB-/Negative/--   

Ratings Placed on CreditWatch
                                        To                 From
Ralcorp Holdings Inc.
 Senior Unsecured                       BBB-/Watch Neg     BBB-


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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