Mega Private Brand Manufacturer – ConAgra Buys Ralcorp $5b

Rodkin - conagraAlthough I rarely write about Private Brand manufacturers – preferring to focus on retailers building brands, this story is just to big to let slip by. Omaha, Nebraska (my new hometown) based manufacturer ConAgra Foods is buying the Private Brand manufacturer Ralcorp for close to $5 billion. This transaction creates one of the largest packaged food companies in North America, with sales of approximately $18 billion annually and more than 36,000 employees. It will also position ConAgra Foods as the largest Private Brand packaged food business in North America, with combined Private Brand sales of approximately $4.5 billion. It should be interesting to see how the new mega company works together with retailers – will consolidation create more homogenous undifferentiated products or will it create opportunities for retailer owned Brands to differentiate?

Ralcorp shareholders will receive $90.00 per share in cash for each outstanding share of common stock held, representing a 28.2% premium to the closing price of Ralcorp’s common stock on November 26, 2012, and a 24.9% premium to the average closing price of Ralcorp’s common stock for the 30 trading days ending November 26, 2012. The transaction is valued at approximately $6.8 billion, including the assumption of debt.

Gary Rodkin, chief executive officer of ConAgra Foods said, “We are very pleased to have reached an agreement with Ralcorp after a period of collaborative dialogue between the two companies. Ralcorp is already the largest private label food company in the U.S. and is well positioned for future growth. The acquisition of Ralcorp is a logical and exciting step for ConAgra Foods. Adding Ralcorp provides us with a much larger presence in the attractive and growing private label segment and accelerates our Recipe for Growth strategy. The transaction will allow us to apply our scale and combined operational expertise to this important growth area, and will strengthen our position as one of the leading food companies in North America. We believe the balanced combination of our very significant branded food business, the largest private label food business in North America, and our important commercial food businesses, will enable ConAgra Foods to deliver even greater value and innovation to our customers and consumers, and sustainable profitable growth to our shareholders. We look forward to working with Ralcorp’s experienced and talented team to capitalize on opportunities and create value for shareholders, and to welcoming Ralcorp’s employees to the ConAgra Foods family.”

Kevin J. Hunt, chief executive officer and president of Ralcorp, said, “We are proud of Ralcorp’s track record of shareholder value creation and view this transaction as the culmination of those efforts. This combination delivers immediate and compelling cash value to our shareholders and benefits to our customers and employees. We believe the two companies are a great fit, and our employees will benefit as part of a larger diversified organization with the necessary scale and resources to be a leader in today’s rapidly evolving marketplace. On behalf of the Ralcorp Board and management team, we thank our dedicated employees for their continued hard work, which has enabled us to grow Ralcorp to a position of strength with our many private label offerings across both retail and commercial channels. We look forward to joining with ConAgra Foods to complete this exciting transaction and capitalize on our future growth opportunities.”

Ralcorp fits well with ConAgra Foods’ Recipe for Growth strategy, set 18 months ago, which includes expansion in the Private Brand segment, growth in its core business and adjacencies, and expansion internationally. According to industry analysts, private label now represents 18% of sales in the packaged food market in the U.S. and has consistently demonstrated growth in excess of the overall food market over time. ConAgra Foods’ combination with Ralcorp creates an enhanced platform that will allow ConAgra Foods to capitalize on, and contribute to, that compelling long-term growth trend while generating significant efficiencies.

Ralcorp has strengthened its leadership position in private label through recent strategic acquisitions and enhanced customer relationships. The two companies’ portfolios are a complementary fit, with very little overlap in terms of offerings. Ralcorp’s leading private label offerings include cereal, pasta, crackers, jellies and jams, syrups, frozen waffles, and more. Ralcorp’s total annual sales of approximately $4.3 billion also include a branded and commercial / foodservice portfolio.

With Ralcorp, ConAgra Foods will have a balanced portfolio with a stronger growth profile. The transaction is also expected to increase ConAgra Foods’ importance to customers and consumers, with product offerings across a wide range of price points, segments and channels. The enhanced breadth and depth of the combined portfolio is expected to allow ConAgra Foods to build deeper customer relationships and drive additional category growth.

Gary Rodkin, chief executive officer of ConAgra Foods, added, “Clearly, consumer dynamics have changed since the recession and we expect growth in private label food to continue to outpace growth in branded food. At the same time, we remain very proud of and fully committed to our brands, which will remain the largest part of our business and are found in 97% of America’s households. We believe our combination of branded, private label and commercial offerings, supported by leading functional capabilities, represents a unique and balanced approach that allows us to address the full range of customer and consumer requirements and adapt to the changing demands of the food industry.”

ConAgra Foods expects the transaction to provide attractive sales and EPS growth over time. Because this transaction is expected to close by March 31, 2013, management expects it to have a modest benefit on fiscal 2013 financial results and will quantify that benefit in the coming months. Excluding any benefit from this transaction, ConAgra Foods’ expectations for fiscal 2013 fully diluted EPS remain unchanged at $2.03 to $2.06, adjusted for items impacting comparability. ConAgra Foods will provide additional details regarding the favorable impact of this transaction on its financial outlook for fiscal years 2013 and 2014, as well as its favorable impact on the company’s long-term financial algorithm, in due course as integration plans, the pace of expected synergies, and the financing components of the transaction are finalized.

ConAgra Foods intends to use its strong infrastructure and productivity capabilities to drive significant cost synergies from this transaction, primarily in the areas of supply chain and procurement efficiencies. It expects to achieve approximately $225 million of cost synergies on an annual basis by the fourth full fiscal year after closing.

The acquisition of Ralcorp is expected to be financed primarily with cash on hand, existing credit facilities and new borrowings, for which ConAgra Foods has received a commitment letter from BofA Merrill Lynch.

ConAgra Foods is fully committed to its investment grade credit rating, and consistent with that commitment, expects to issue up to $350 million of equity. ConAgra Foods will prioritize rapid deleveraging in the near term through its strong cash flow generation. The company currently expects to maintain its dividend of $1.00 per share on an annual basis and will significantly reduce its share buyback activities for a period of time. ConAgra Foods remains committed to its long-term capital allocation priorities, including a top-tier dividend, strong balance sheet and strong liquidity.

ConAgra Foods and Ralcorp will establish a transition team comprised of members of both management teams to prepare for and to oversee the integration of the businesses.

The transaction is subject to the approval of Ralcorp’s shareholders and customary regulatory approvals. The transaction is expected to close by March 31, 2013.

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Christopher Durham
Christopher Durham is the president of My Private Brand and the co-founder of The Vertex Awards. He is a strategist, author, consultant and retailer who built brands at Delhaize-owned Food Lion, and lead strategy and brand development for Lowe’s Home Improvement. He has consulted with retailers around the world on their private brand portfolios including: Family Dollar, Petco, Staples, Office Depot, Best Buy, Metro (Canada), TLW (Taiwan) and Hola (Taiwan). Durham has published five definitive books on private brands, including his first book, Fifty2: The My Private Brand Project. In 2017, he will debut his newest book, Vanguard: Vintage Originals, a visual tour of innovation and disruption in private brand going back to the mid-1800’s. Dynamic in his presentation while down to earth and frank in his opinions, he has presented at numerous conferences, including FUSE, The Dieline Conference, Packaging that Sells, Omnishopper and PLMA’a annual trade show in Chicago. Durham lives in Charlotte, NC with his wife, Laraine, and two daughters, Olivia and Sarah.