St. Louis-based Ralcorp Holdings Inc. is adding pasta to its portfolio with the acquisition of Kansas City-based American Italian Pasta Co., the largest producer of dry pasta in North America.
In doing so, Ralcorp will expand its current offerings, which include Post-brand and private-label cereals as well as crackers, cookies, frozen breakfast foods, muffins, snacks and sauces.
The boards of directors of both companies have approved the merger agreement, which calls for Ralcorp to buy American Italian’s stock for $53 per share in cash — a 27 percent premium over the closing share price on Friday. The $1.2 billion price tag will be paid for through a mix of cash on hand and debt.
Ralcorp has been on an acquisition spree. Since 1997, it has acquired about 21 companies. The highest-profile addition to date came in 2008, when Ralcorp bought Post cereals, which makes one of the top cereals on the market — Honey Bunches of Oats.
During a conference call with investors Monday, company executives described the deal as the Ralcorp’s strongest acquisition to date. It will introduce the company into a large new food category and build on its private-label business. Private-label products are sold under a retailer’s own label and typically at a lower cost than a national brand.
Also on Monday, Ralcorp announced that it acquired two Canadian private-label cracker companies — North American Baking and J.T. Bakeries Inc. — in separate transactions completed on May 31. The two companies have combined annual net sales of $95 million.
Kevin Hunt, Ralcorp’s co-chief executive, said in the call that he expected American Italian Pasta to make up 13 percent of Ralcorp’s projected $4.7 billion in revenue after the acquisition. By comparison, the company had $3.9 billion of revenue in the previous year as of March, about 27 percent of which came from Post cereals, he said.
He called the acquisition a "compelling growth opportunity" for Ralcorp that would complement and broaden its portfolio.
"They really are the private-label leader in the pasta category," Hunt said. "It is clear that this transaction has the potential to further strengthen our position as a leading provider of private-label and branded food products."
Hunt said he hoped to leverage the company’s increased presence in private-label foods by cross-marketing brands and products. He added that there were also opportunities down the road to enter new categories such as refrigerated and frozen pasta.
The $2 billion dry pasta market is growing and has "benefited from its status as a reliable pantry staple," Hunt said.
Pasta sales were up 2.4 percent in volume last year, he said.
Ralcorp also announced Monday that increased competition in the cereal market was continuing to be a challenge, leading the company to expect lower earnings per share in the third quarter — $1 per share, down from $1.31 from the corresponding period last year.
David Skarie, Ralcorp’s co-chief executive, said in the call that the company’s market share in cereal had eroded since April 2009.
"Unfortunately, the cereal category dynamics have become increasingly competitive as the frequency of promotion always high in a category to begin with has increased," he said. "Additionally, the depth of promotional activity has also risen."
The acquisition of American Italian Pasta, which is pending regulatory and shareholder approval, is expected to close during Ralcorp’s fourth fiscal quarter ending Sept. 30. Ralcorp said it expected the deal to add at least 50 cents a share to its earnings in fiscal 2010.
In a research note Monday, Jonathan Feeney, an analyst with Janney Montgomery Scott of Philadelphia, wrote that he expected the benefit of the acquisition to be larger than the company’s "very modest" estimate of 50 cents per share.
Feeney also said he was "alarmed" by the problems Ralcorp had been having in its cereal category. But, he added, it "should get dramatically better."
American Pasta makes and sells both regionally branded and private-label pasta. It has four plants and 675 employees. Its net sales in the last fiscal year were $628 million, a 10 percent increase from the year before.
Under the proposed acquisition, it would become a wholly owned subsidiary and would operate as an independent division of Ralcorp. American Italian’s current chief executive, Jack Kelly, will continue to manage the business and will report to Hunt.
Details on whether some American Italian jobs would be transferred from Kansas City to St. Louis were not disclosed.
Ralcorp closed Monday at $57.28 a share, down 7.9 percent from the previous close. Meanwhile, American Italian closed at the end of the day at $52.66 a share, up 26.2 percent.
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Filed under: economics by Pascal
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