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Chef Boyardon't

4 May 2011 By Rob Cox

For a company that excels at fattening the human race, ConAgra is being stingy with Ralcorp shareholders. The Slim Jim-to-Jiffy Pop food conglomerate has gone hostile for the cereal maker with a $4.9 billion offer. But the $86 a share it put on the table represents a modest premium. Ralcorp has good reason to resist the entreaties of Chef Boyardee: ConAgra can afford to pay as much as $100.

The two companies clearly belong together like Raisin Bran and milk. Raw material costs are rising. Sugar, canola and wheat all have recently touched near record highs. Meantime, economic pressures in their core U.S. market have made it difficult for branded consumer goods makers to lift the prices on supermarket shelves.

Ralcorp offers ConAgra –and maybe other potential food conglomerates – a way to fight against these threats to profitability. First, Ralcorp’s focus on generic, white-label goods offers a hedge against consumers trading down from higher-priced brands. Second, ConAgra says it can harvest $250 million of cost savings from the combination.

But it’s not offering Ralcorp shareholders a sweet enough deal. For one, ConAgra’s contention that it’s offering a 32 percent premium to the undisturbed price of the stock is a fiction. It’s using Ralcorp’s price as of March 21, the day before its first $82 a share offer. Factor in the 11 percent increase since then in the shares of ConAgra and other food makers and the premium is a soggy 19 percent.

On that basis, it is paying Ralcorp shareholders around $750 million, or $13.50 a share, more for control of the company. Yet the capitalized value of projected synergies amounts to more than $1.5 billion. That means ConAgra can afford to pay nearly $100 a share for Ralcorp without frittering away all of the benefits of the deal.

Moreover, an acquisition at that price would put Ralcorp’s enterprise value at around 9.5 times EBITDA. By comparison, Kraft Foods bought Cadbury – after a protracted trans-Atlantic fight – for more than 11 times EBITDA. To bag Ralcorp, ConAgra needs to add at least two more scoops of cash to its offer.


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