NEW YORK -- ConAgra Foods is set to become the nation's biggest maker of store-brand foods, with a $5 billion purchase of Ralcorp that expands its stake in the growing market for cereals, crackers and other packaged foods sold under private labels.
The deal announced Tuesday caps a year of acquisitions for ConAgra (NYSE: CAG), which makes brands including Banquet, Chef Boyardee and Marie Callender's. The company, based in Omaha, Neb., also made multiple attempts to buy Ralcorp (NYSE: RAH) last year.
The latest bid for Ralcorp 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 percent of the overall packaged food market.
In a new report this week, however, market researcher SymphonyIRI wrote that the growth of private label products has ebbed and “hit a proverbial glass ceiling.” It also said that the private-label market has entered a phase of “pockets of growth” among categories, rather than a general expansion. Separately on Tuesday, Ralcorp attributed an 8 percent increase in net sales to acquisitions and higher prices, which offset lower volumes.
Like many other packaged food companies, ConAgra already made private-label products along with name-brand foods that include Slim Jim, Healthy Choice and Hebrew National. 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 range of companies including Wal-Mart Stores Inc. (NYSE: WMT), Kroger Co. (NYSE: KR) and McDonald's Corp. (NYSE: MCD).
Rather than merely mimicking name brands, Rodkin said that retailers increasingly want to cultivate customer loyalty by offering unique products. He cited CostCo (Nasdaq: COST) 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. He said ConAgra would use its experience with name brands to innovate private label products.
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, adding 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 percent premium to its Monday closing price of $70.23. St. Louis-based Ralcorp currently has about 55 million outstanding shares, according to FactSet.
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 be of modest benefit to its fiscal 2013 financial results. The company still anticipates fiscal 2013 earnings in a range of $2.03 to $2.06 per share, excluding the Ralcorp deal.
Analysts predict earnings of $2.06 per share.
Also on Tuesday, Ralcorp reported that its loss narrowed to $44.2 million, or 80 cents per share, for the quarter ended Sept. 30. That compares with a loss of $424.1 million, or $7.54 per share, in the year-ago period. Revenue rose to $1.07 billion from $990.4 million, on the strength of acquisitions and higher prices.
Results for both quarters reflected hedging and impairment charges, as well as costs for restructuring and plant closures.
Ralcorp shares jumped $18.59, or 26.5 percent, to $88.82 in Tuesday afternoon trading. ConAgra gained $1.40, or 5 percent, to $29.69.