ConAgra Foods is set to become the biggest American maker of store brand foods, with its $5 billion US purchase of Ralcorp expanding its stake in the fast-growing market for cereals, crackers and other packaged foods sold under private labels.
The deal caps a year of acquisitions for ConAgra, which makes Banquet, Chef Boyardee and Marie Callender's.
The company, based in Omaha, Neb., also snapped up brands including National Pretzel, Bertolli frozen meals and Del Monte Canada in the past year.
The Ralcorp purchase comes at a time when private label brands — also known as store brands or house brands — are gaining popularity with price-conscious shoppers.
Supermarkets and drug stores have also been working to improve the image of their brands as a way to control the rising costs for name brands.
In a conference call with analysts, ConAgra CEO Gary Rodkin noted that private label products are growing at twice the rate of name brands and now account for 18 per cent of the overall packaged food market.
Rather than merely mimicking name brands, Rodkin said that retailers increasingly want to cultivate customer loyalty by offering innovative or unique products. He cited CostCo and Trader Joe's as companies that are significantly developing their store brands.
"The private label industry for the most part has been more emulation oriented," Rodkin said in a conference call with analysts. But he said ConAgra will apply its experience with name brands to meet the demand for more innovative private label products.
Quarter of revenue will come from private labels
Like many other packaged food companies, ConAgra already made private label products along with its name brand foods.
With the Ralcorp purchase, about a quarter of the combined company's $18 billion in sales will now come from private labels.
Ralcorp, based in St. Louis, makes products for a wide array of companies including Wal-Mart Stores Inc., Kroger Co. and McDonald's Corp.
Kevin Hunt, CEO of Ralcorp, noted the private-label business is about $100 billion but that the industry is very fragmented, meaning there's "a lot of opportunity" for further consolidation.
The companies did not say whether there would be any layoffs for their 36,000 employees, saying that the deal was about "growth."
They said operational decisions would be made during the integration process.
This isn't the first time ConAgra has tried to buy Ralcorp. Last year, Ralcorp spurned several bids by ConAgra, including an offer for $5.17 billion, or $94 per share. At the time, Ralcorp's board said its plan to spin off its Post cereal business and build its private-label business would provide the best value for shareholders.
The latest $90 per share deal by ConAgra is close to what it offered before Ralcorp's split with Post. ConAgra will pay Ralcorp Holdings Inc. stockholders $90 per share, a 28 per cent premium to its Monday closing price of $70.23.
ConAgra expects modest benefit next year
St. Louis-based Ralcorp currently has about 55 million outstanding shares, according to FactSet.
Ralcorp's stock jumped $18.48, or 26.3 per cent, to $88.71 in midday trading. Shares of ConAgra gained $1.28, or 4.5 per cent, to $29.57.
The companies value the transaction at about $6.8 billion when debt is included.
ConAgra said it plans to finance the acquisition mostly with available cash, existing credit facilities and new borrowings. It expects about $225 million in cost savings on an annual basis by the fourth full fiscal year after the deal closes.
The deal, which was unanimously approved by both companies' boards, is expected to close by March 31.
It still needs Ralcorp shareholder approval.
ConAgra said that the buyout should have a modest benefit on its fiscal 2013 financial results. The company still anticipates fiscal 2013 earnings in a range of $2.03 to $2.06 per share, excluding any benefit from the Ralcorp deal.
Analysts predict earnings of $2.06 per share.