CORRECTED-UPDATE 2-Ralcorp to acquire Kraft's Post cereals

(Corrects debt amount in 7th paragraph to millions, not billions)

By Brad Dorfman

CHICAGO, Nov 15 (Reuters) - Ralcorp Holdings Inc (RAH.N) said on Thursday it would acquire Kraft Foods Inc's (KFT.N) Post cereals business in a deal valued at about $1.65 billion, sending Ralcorp's shares up 8 percent.

The complex deal, structured to be tax-free to shareholders of both companies, would leave Kraft shareholders with about 54 percent of the stock in Ralcorp.

Kraft shares edged lower on the deal.

Kraft has been considering strategic alternatives for Post, the No. 3 U.S. ready-to-eat cereal maker, since early this year, a spokeswoman said.

Kraft has been selling some businesses to focus on brands that are either No. 1 or No. 2 in market share and have strong growth potential. It continues to evaluate its portfolio, the spokeswoman said, declining to add if any other business were up for sale.

For Ralcorp, the deal would lift annual revenue by about 50 percent to $3.3 billion and give the company a branded cereal business to go along with its private label cereals. Ralcorp said sales organizations for the two businesses would remain separate.

Including about $950 million in debt assumed by Ralcorp, the deal for the maker of Grape Nuts and Fruity Pebbles is worth $2.6 billion, said Ralcorp, which also makes frozen bakery foods.

The price was about in line with expectations, especially since the pool of potential bidders was somewhat limited, said Gregg Warren, an analyst at Morningstar. No. 1 U.S. cereal maker Kellogg Co (K.N) and No. 2 General Mills Inc (GIS.N) might have been blocked for antitrust reasons, while private equity firms are facing a crunch in the credit markets, he said.

"It is nice to see that they are freeing up about $1 billion in debt capacity," Warren said of Kraft, adding that the company could use that capacity to facilitate more share repurchases.

Under the terms of the deal, Kraft would distribute ownership of Post and related assets to Kraft shareholders in either a split-off or spin-off transaction, depending on market conditions.

In a spinoff, all Kraft shareholders would receive Ralcorp shares and the deal would cut Kraft annual earnings by about 13 cents a share, Kraft said.

In a split-off, Kraft shareholders would have the option to exchange their Kraft shares and receive Ralcorp shares at closing. Such a deal would cut Kraft earnings by about 7 cents a share because Kraft would have fewer shares outstanding.

The deal is expected to close in mid-2008, according to Ralcorp, which was advised by Banc of America Securities LLC and Brian Cave LLP.

Kraft was advised by Centerview Partners LLC and The Blackstone Group.

Kraft shares were down 15 cents at $32.83 on Thursday on the New York Stock Exchange, while Ralcorp shares were up $4.53 at $60.00. (Additional reporting by Nicole Maestri; editing by Steve Orlofsky)