DealBook: ConAgra May Have to Go Hostile After Ralcorp Rejects Offer

Paul Sakuma/Associated Press Post Cereals are among Ralcorp’s brands. But ConAgra is interested in Ralcorp’s generic labels.

ConAgra Foods’ proposal to buy Ralcorp Holdings for $4.9 billion may be called a bear hug, but the deal is far from warm and fuzzy.

After an earlier rejection by Ralcorp, ConAgra, whose lineup includes the Chef Boyardee, Orville Redenbacher and Healthy Choice brands, sweetened its bid to $86 a share on Wednesday as it looked to fill its portfolio with generic goods. That is 32 percent above Ralcorp’s share price on March 21, the day before ConAgra made its first approach.

But within hours, the Ralcorp board once again rebuffed a deal, saying it did not make sense for its investors.

Now, ConAgra may have to decide whether to make a hostile play for the food manufacturer and take the offer directly to Ralcorp’s shareholders. Investors who own both companies have already expressed interest in a merger, according to a person close to ConAgra who was not authorized to talk publicly.

Unwanted bidders have become increasingly common. In the last year, more than 16 percent of the announced deals have been unsolicited, up from less than 1 percent over the previous 12 months, according to Thomson Reuters.

The tactic has had varying degrees of success. For months, the board of Genzyme resisted the advances of the French drug maker Sanofi-Aventis, which tried to buy the biotechnology company for $18.5 billion. The two eventually came to terms in February, with Sanofi agreeing to pay at least $20.1 billion.

Valeant Pharmaceuticals International’s aggressive move for Cephalon didn’t work out as well. After rejecting Valeant’s $5.7 billion offer as too low, the biopharmaceutical agreed a few weeks later in May to a $6.8 billion tie-up with Teva Pharmaceutical Industries, the world’s largest generic drug maker.

As with other industry players, ConAgra is dealing with a combination of increased global competition and rising commodity prices — an environment that makes size all the more important. Many of the nation’s biggest food producers are finding it difficult to demand high prices from consumers who have a dizzying array of high-quality generic options. Private-label products now account for 19 percent of supermarkets sales, up from 16 percent in 2005.

While Ralcorp owns the Post brand of cereals, ConAgra’s main focus is the company’s expansive line of generic products, which includes cereal, pasta, crackers and frozen waffles. Last year, Ralcorp, which was created from the 1994 spinoff of the cereal, cookie and baby food businesses of Ralston Purina, bought four private-label businesses, including the American Italian Pasta Company for $1.2 billion.

“We think this is a business that aligns well with ConAgra Foods’ strategic priorities and capabilities,” Gary M. Rodkin, chief executive of ConAgra, said in a call with analysts.

It is a familiar arena to ConAgra, which currently derives about 7 percent of its sales, or $850 million, from generic products. Even in its branded portfolio, the food manufacturer has tended to offer more value-priced goods, compared with rivals like Kraft.

“They are cousins in terms of the types of companies they are,” said David Palmer, an analyst at UBS.

The combined company would have about $4 billion in private-label sales, roughly 25 percent of overall revenues.

But Ralcorp’s board, which in April rejected a lower bid of $82 in cash and stock, continues to resist the deal, adopting a poison pill that will help it block unwanted advances.

“Ralcorp, as an independent company, has a proven track record of delivering superior results and shareholder value,” the company’s chairman, William Stiritz, said in a statement.

Ralcorp already had plenty of tools to scuttle a deal. The company is incorporated and based in Missouri, whose anti-takeover rules are among the country’s toughest. The Ralcorp board is also elected on a staggered basis, which means it would take at least two annual meetings to replace a majority of directors.

ConAgra may have one factor working in its favor. Ralcorp and ConAgra have a large number of the same shareholders. Roughly 45 to 50 percent of the investor base is the same, excluding passive investors like index funds that are required to own the companies. They could put pressure on Ralcorp to come to the negotiating table. Some investors, according to the person close to ConAgra, have already shown support for a deal.

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