TEXT-Fitch cuts ConAgra Foods to 'BBB-/F3'

Tue Nov 27, 2012 4:34pm EST

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Nov 27 - Fitch Ratings has downgraded the following ratings of ConAgra
Foods, Inc. (ConAgra) on the company's definitive agreement to acquire
Ralcorp Holdings, Inc. (Ralcorp) for $5.1 billion equity value, or approximately
$6.8 billion transaction value including assumed debt.

ConAgra Foods, Inc.

--Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB';
--Senior unsecured notes to 'BBB-' from 'BBB';
--Bank credit facility to 'BBB-' from 'BBB';
--Subordinated notes to 'BB+' from 'BBB-';
--Short-term IDR to 'F3' from 'F2';
--Commercial paper to 'F3' from 'F2'.

Concurrently, the ratings of Ralcorp were affirmed as follows:

Ralcorp Holdings, Inc.
--Long-term Issuer IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank credit facilities at 'BBB-';
--Short-term IDR at 'F3'.

The definitive agreement was unanimously approved by both companies' Boards of
Directors, and the transaction is expected to close by March 31, 2013, pending
Ralcorp's shareholders' and regulatory approvals. The $90.00 per share agreement
represents a 28.2% premium to Ralcorp's closing stock price on Nov. 26, 2012.
The combined company will be one of the largest packaged food companies in North
America, with net sales of approximately $18 billion. In addition to the
company's significant branded food presence, ConAgra will be the largest
private-label food company in the U.S., increasing ConAgra's approximately $950
million private-label sales to $4.5 billion. Revenue sources will be more
balanced, consisting of 43% branded and 25% private-label packaged foods through
the retail channel and 32% to the commercial/foodservice markets.

ConAgra's leverage will increase substantially with this combination and this
results in financial metrics that are weak for the rating category in the near
term. Nonetheless, the company's commitment to de-leveraging, good liquidity,
and the strength of the strategic combination support the 'BBB-' ratings.
ConAgra expects to issue up to $350 million of equity and use some cash on hand.
However, the transaction will be predominantly debt financed. Fitch estimates
that pro forma total debt to EBITDA will initially be slightly more than 4.0
times (x), factoring in the use of a portion of ConAgra's $116.5 million cash at
Aug. 26, 2012, as well as part of the cash from its September 2012 $750 million
debt issuance after commercial paper repayment of roughly $300 million.

Fitch has factored into the ratings ConAgra's commitment to prioritize its free
cash flow (FCF) for debt reduction within 18 to 24 months after the transaction
closes. Maintaining the current dividend level and very modest share repurchases
should support significant debt reduction needed to retain investment grade
ratings. Fitch believes ConAgra's target of approximately $225 million in annual
cost savings by the fourth full fiscal year after the closing, driven by supply
chain and SG&A efficiencies, will be achievable, based on similar transactions.
However, Fitch believes the near-term benefit is likely to be outweighed by
costs to achieve those synergies.

The acquisition of Ralcorp is in line with ConAgra's strategic growth objective
to increase its exposure to private label. Private label historically has grown
faster than branded packaged food. The transaction has good strategic rationale
as both companies operate primarily in the center of the store in complementary
categories without significant overlap between branded and private-label
products. ConAgra will benefit from Ralcorp's higher margin predominantly
private-label portfolio. However, with both companies operating primarily in the
United States, this transaction does not broaden their geographic exposure to
faster growing markets. Both companies have recently been highly acquisitive,
and that is also taken into consideration for the ratings. Acquisitions are not
anticipated until leverage is solidly back in line with the rating level.

ConAgra is expected to maintain adequate liquidity, including a portion of its
cash balance, and a substantial part of its currently undrawn $1.5 billion
revolving credit facility that matures Sept. 14, 2016. The credit facility
provides backup to ConAgra's CP program. It contains financial maintenance
covenants requiring that the fixed charge coverage ratio must exceed 1.75 to 1.0
and consolidated funded debt must not exceed 65% of the consolidated capital
base. The company is expected to remain in compliance with its covenants.
Upcoming long-term debt maturities are manageable. Fitch anticipates ConAgra is
likely to refinance and/or use cash to pay down part of its next significant
debt maturities, which are $500 million 5.875% notes due in April 2014 and $250
million 1.35% notes due Sept. 10, 2015. Fitch expects new debt for the
transaction to be structured to allow significant debt reduction within two
years post acquisition.

What Could Trigger a Rating Action

Future developments that may, individually or collectively, lead to a negative
rating action include:
--If ConAgra's planned debt reduction falters significantly, which could occur
due to shortfalls in earnings/cash flow, such that leverage remains at or above
the mid-3.0x range.

Future developments that may, individually or collectively, lead to a positive
rating action include:
-- A positive rating action is not anticipated in the near term. Beyond this
timeframe, a positive rating action could be supported by substantial and
growing FCF generation, along with leverage (total debt-to-operating EBITDA)
consistently in the mid-2x range. Maintenance of conservative financial
policies, such as publicly stating that its financial strategies no longer
include large acquisitions that require substantial debt financing, could also
support an upgrade.


Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
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