Food fight : The anatomy of a takeover

10:15 pm - Sun, Sep 25, 2011: 2 notes

Rashmi Raman

Food fight : The anatomy of a takeover

Exterior view of the ConAgra Foods Inc. plant in Kansas City, Kansas July 2, 2004. REUTERS/Dave Kaup

ConAgra foods, maker of products ranging from Slim Jim meat sticks to PAM cooking spray, has been getting a lot of coverage in US business media lately for its takeover strategy.

Over the past six months, ConAgra bid up to $5.2 billion to acquire Ralcorp Holdings Inc. which Ralcorp ultimately rejected on Sept. 19. Ralcorp, no stranger to deal making itself, had acquired Post Foods in 2008 from Kraft.

This story of this takeover is a long one.

ConAgra had a dismal 2010 - a weak economy, stiff competition and lack of international presence were cited as some of the reasons for its poor showing. It would seem counter intuitive for ConAgra to go shopping for another company.

So, why the bid? The Economist reports that

Among European and American companies debt as a proportion of profits (measured by EBITDA) has returned to 2007 levels, and the proportion of debt that is short term has declined. The basis of this corporate recovery is well known. In response to the financial crisis, corporations cut costs and acquisitions and hoarded cash. What are corporations to do with this cash pile?

Zachary R. Mider and Jeffrey McCracken in Bloomberg Businessweek pointed out that it’s all about the bottom line

Stocks of companies announcing acquisitions this year have posted a median gain of 1.18 percentage points above their benchmarks.

The beginning

The ConAgra story began on an intriguing note. In a press release in May, Ralcorp announced that the company had received a proposal in March for a takeover and had rejected it.

ConAgra was not deterred - it announced a bid for $4.9 billion. Business wires began buzzing. But they weren’t alone in their excitement. ConAgra and Ralcorp share prices saw a sharp spike. ConAgra also became one of the hottest stocks to monitor.

Video courtesy of the Wall Street Journal online edition

While some watchers were looking into the possible ramnifications of this deal, others were advising a cautious outlook. Shira Ovide from the Wall Street Journal wondered if markets were being unnecessarily excited.

Ralcorp shares, which a week ago were floating around $69 apiece, today in pre-market trading are popping to $88.74 each. You’ll notice that’s well above the ConAgra offer.

Stephen Davidoff commented in the New York Times on the challenges that could make this deal difficult - these included Missouri laws protecting an unwilling seller. Ralcorp definitely was an unwilling seller. It rejected the bid and adopted a “poison pill” - a strategy exercised during hostile takeovers to make the company less attractive to the acquirer - in the form of a shareholder rights plan.

The middle

Cut to July when matters started getting really interesting. Ralcorp announced its plan to create Post Foods as a separate business. Ostensibly, it was a move to avoid taxes, but it also helped make Ralcorp more unattractive since ConAgra was most interested in the private label food business.

A Private Label Manufacturer is a person that does NOT directly manufacture product. Another firm makes the product, and the private label manufacturer labels the product with their own name and address.

Definition courtesy Texas Department of State Health Services website

And in August, Ralcorp played its next card - entering a deal to buy Sara Lee’s refrigerated dough manufacturing division for $545 million. It did not escape anyone’s notice that this would make Ralcorp a bigger company than ConAgra.

So, how did ConAgra counter? By raising the value of its bid to $94 per share far above its original bid of $82 in March. Ralcorp turned it down. Again. Around that time, ConAgra’s stock price was trading between $23 and $24 (having hit a high of about $26.50 in July). Ralcorp was now priced at around $75 - a far cry from those prices in May. This was a sure sign that the markets were baffled.

The end - well, not really

On Sept. 13, ConAgra issued an ultimatum - no deal if Ralcorp does not enter discussions by Sept. 19. Predictably, the market reacted by selling Ralcorp stock - and the share price fell by 10%.

Ralcorp, true to form, declined the invitation, confident of the fact that ConAgra would stick to its threat, which it did as announced on Sep 19.

Later this week, while discussing its earnings for the first quarter of 2012, ConAgra executives reported that higher commodity costs had eaten into its profits and that its net income had fallen from $146 million to $85 million. But they were far from deterred. In the same conference call, CEO Gary Ridkin said acquisitions were very much part of the plans for the future.

As you saw with the Ralcorp experience, we are ready and willing to leverage our capabilities and balance sheet for the right growth opportunities.This is a core strategic element of creating long-term value for ConAgraFoods.