The Largest Acqusition in the US Diversified Food Sector

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One strategy for opportunistic investors is to invest in companies that have a high probability of being acquired. In order to pick the next potential buyout candidates, we need study the past buyout deals to understand about the reasoning behind each deal and the average buyout valuations. In November 2012, ConAgra Foods (NYSE: CAG) announced that it would acquire Ralcorp (NYSE: RAH) for $90 per share, with a total transaction value of $6.8 billion including the assumption of debt. The acquisition was completed in the end of January. Are there a lot of synergies between the two companies? Is a $90 offer a high price?  

ConAgra’s Business Snapshot

ConAgra is one of the leaders in North America food industry, operating in two main operating segments: Consumer Foods and Commercial Foods. Consumer Foods sells a wide range of food brands including Blue Bonnet, DAVID, Alexia, and Banquet in retail and foodservice channels in North America. Commercial Foods sells branded foods and ingredients under several brands including ConAgra Mills, Lamb Weston to food manufacturing and industrial customers. The company’s largest customer was Wal-Mart, which accounted for 17% of total net sales in fiscal 2012. 

Ralcorp – A Leader in Private Brand Food Sector 

Ralcorp is also the leading private brand food products supplier to retail and foodservice channel, with four main operating segments: Snacks, Sauces & Spreads, Frozen Bakery Products, Cereal Products and Pasta. Wal-Mart is also a Ralcorp’s biggest customer, and accounted for 17% of the total revenue. The top 5 customers represented 38% of total net sales. The majority of Ralcorp’s revenue, $1.75 billion, or 40.5%, was generated from Snacks, Sauces & Spreads business. It was also the biggest profit contributor, with $140.4 million in profit, accounting for nearly 33% of the total company’s profit in fiscal 2012.

In early 2012, Ralcorp spun off Post Holdings (NYSE: POST). With a 10.4% market share, Post is considered the third largest company in the US cereal market. William Stiritz, a long time chairman of Ralcorp, has become the chairman and CEO of Post. It is interesting to note that Stiritz would manage Post with a base salary of only $1. The majority of his compensation was stock awards and stock options. Mario Gabelli, the famous investment manager, expected that Post’s earnings might double in the next 3-4 years.

Four Main Strategic Benefits of the Deal

ConAgra saw four main strategic benefits in Ralcorp’s acquisition. First, ConAgra would become one of the largest packaged food companies in North America, with total net sales of $18 billion and more than 36,000 employees. It would also become the leader in private label food sector in North America, with the combined private brand food sales of nearly $4.5 billion. Second, as Ralcorp has relationships with all the major retailers, quick service restaurants, and food distributors in North America, ConAgra could take advantage of Ralcorp’s efficient sales channels and price points. It could increase the company’s importance to customers and suppliers. Third, as around 70% of Ralcorp’s products, which includes crackers, snack nuts, pasta, peanut butter, refrigerated nuts and jams, holds the number 1 market leading position, the acquisition would enhance ConAgra’s position in many attractive and fast growing food segments. Last but not least, ConAgra could have a more balanced product portfolio. After the deal, the Branded segment would contribute 43% of the total sales, while Private Label and Commercial/Foodservice contribute 25% and 32% of the total sales.

Valuation

In terms of the financials, ConAgra expected that the cost synergies would be around $225 million per year by the fourth year. It also expected to issue up to $350 million equity to increase financial flexibility.  Interestingly, ConAgra tried to buy Ralcorp for $94 per share in 2011, but got rejected. The previous offer valued Ralcorp at 9.4x EV/EBITDA. This time, ConAgra was successful, but with a higher valuation of 11x EV/EBITDA. 

Foolish Bottom Line

ConAgra would definitely strengthen its market leading position in both branded and private brand food sectors with Ralcorp’s acquisition. According to Bloomberg, the median EV multiples was 10.5x in 13 comparable deals in the past 10 years. Thus, with the great synergies between the two leading food businesses, I don’t think the deal is overpriced. 


hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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