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Shares of ConAgra Foods (CAG) rose some 4.7% in Tuesday's trading session. The consumer and commercial foods company continued its string of acquisitions. Before the market open, ConAgra announced the acquisition of Ralcorp Holdings (RAH) for $90 per share.

ConAgra finally managed to acquire its much-desired assets. Last year, the firm offered $82 per share for Ralcorp which later got revised to a final offer of $94 per share. The firm declined to sell the business last year, but under pressure from activist shareholder Corvex Management a deal was reached.

The Deal

ConAgra Foods announced on Tuesday that it will acquire Ralcorp for $90 per share. The transaction values the company at roughly $6.8 billion, including the assumption of debt. The deal values Ralcorp's equity at roughly $4.9 billion, and the firm will assume the roughly $2 billion in debt outstanding. The offer of $90 per share, represents a 28.2% premium compared to Monday's closing price. Shares of Ralcorp rose 26.4% to $88.80 per share.

Combined, the companies will form one of the largest packaged food companies in North America, with over 36,000 employees and $18 billion in annual sales. Private label sales of the combined entity are roughly $4.5 billion per annum. Ralcorp will offer private label cereal, pasta, crackers and waffles to the combined entity.

ConAgra's CEO Gary Rodkin commented on the deal, "We are very pleased to have reached an agreement with Ralcorp after a period of collaborative dialogue between the two companies. Ralcorp is already the largest private label food company in the U.S. and is well positioned for future growth. The acquisition of Ralcorp is a logical and exciting step for ConAgra Foods."

For its full year of 2011, Ralcorp generated revenues of $3.8 billion on which the company lost $241.2 million after reporting positive operating income of $326.2 million. The equity part values Ralcorp at 1.3 times annual revenues and roughly 15 times operating earnings.

The acquisition is expected to close in March of 2013. The deal will have a modest benefit on 2013's results, to be quantified in the coming months. The deal will result in $225 million in cost synergies in the fourth fiscal year after the closure of the deal.

ConAgra will issue up to $350 million in new equity and will significantly cut back on share buyback programs to finance the deal. The remainder of the sum will be financed with cash on hand, operating cash flows and a loan from Bank of America (BAC). The $1 annual dividend will be maintained. The deal is subject to customary closing conditions, shareholder, and regulatory approval.

Valuation

ConAgra ended its first quarter of its fiscal 2013 with $116.5 million in cash and equivalents. The company operates with $3.15 billion in short and long term debt for a net debt position just north of $3 billion. The net debt position is expected to increase to over $9 billion as a result of the deal.

ConAgra generated $13.3 billion in revenues for its fiscal 2012. The company net earned $467.9 million, or $1.15 per diluted share.

The market currently values ConAgra at $12.1 billion. This values the firm at 0.9 times annual revenues and roughly 25 times annual earnings.

ConAgra maintains it current quarterly dividend of $0.25 per share, for an annual dividend yield of 3.4%.

Some Historic Perspective

Year to date, shares of ConAgra have risen some 12%. Shares started the year around $26 per share and fell to lows of $24 in July. Shares recovered from that point in time, currently exchanging hands at almost $30 per share.

Over the past decade, shares of ConAgra have traded anywhere between highs of $30 in 2005 and lows of $15 during the financial crisis. Shares are currently trading at the high-end of the range. Between its fiscal 2009 and 2012, ConAgra reported a cumulative revenue growth of 7% to $13.3 billion. Net income fell from $978 million to $468 million.

Investment Thesis

Combined, Ralcorp and ConAgra are expected to generate annual revenues of $18 billion. The companies reported roughly $600 million in adjusted earnings over the past year. Annual cost synergies which could total $225 million in four year's time, could boost annual earnings by roughly $150 million. As such, the combination could earn $750 million.

ConAgra is valued at approximately $12.5 billion, including the new $350 million equity offering. The company will furthermore support an estimated $9 billion debt load as well. The equity of ConAgra will be valued at 0.7 times annual revenues and 16-17 times annual earnings.

CEO Radkin points out that the deal boosts ConAgra's growth profile by adding operations in the fact growing private label segment, accelerating the "Recipe for Growth strategy." As part of the strategy, ConAgra already bought Unilever's frozen-meal business, which includes Bertolli for $265 million, earlier this year.

I applaud the strategic rationale of the deal, as the combination will be a key player in the private label segment, and shareholders of ConAgra seem to agree. Still, the deal comes at a price, as it significantly adds to ConAgra's debt position. Despite the significant synergies, I refrain from investing. The valuation is not appealing enough, given the integration risks and the significant debt load.

Source: ConAgra Foods - Investors Applaud The Acquisition Of Ralcorp, I Remain On The Sideline