Kraft's Post Cereals to Merge With Ralcorp in $2.6B Deal (update)

Kraft Foods (KFT) said Thursday it has agreed to merge its Post Cereals unit with Ralcorp (RAH) for approximately $2.6 billion in stock, including debt assumption, ending months of speculation after Kraft said in August it was exploring selling its cereal business (full story). The deal, Ralcorp said, "Creates a larger, stronger business with a portfolio of businesses balanced between branded, private-label and frozen bakery food products [and] increases 2007 sales by 50% to $3.3 billion a year from $2.2 billion, with Post cereals accounting for approximately 32% of total annual sales." Kraft will distribute ownership of Post to shareholders through either a split-off or spin-off, to be determined. A split-off gives Kraft shareholders the option to exchange Kraft shares for stock in the new Ralcorp. A spin-off involves a pro-rata distribution of shares to Kraft shareholders. Either way, upon closing, current Kraft shareholders will own approximately 54% of the new Ralcorp, while current Ralcorp shareholders will own approximately 46% of the combined company. "This is a transforming event for Ralcorp. The addition of Post cereals gives Ralcorp a truly distinctive line of branded cereal products plus a branded infrastructure and platform that we can build on through organic growth and acquisitions," said Ralcorp CEO David P. Skarie (Press release).

The deal vindicates activist investor Nelson Peltz, who owns 3% of Kraft, and has urged CEO Irene Rosenfeld to sell the stagnant Post operations. Market research data indicates sales of Post cereals at food retailers excluding Wal-Mart fell 2% over the first nine months of 2007, while sales in the overall ready-to-eat cereal category were flat. According to people familiar with the deal, PepsiCo (PEP), General Mills (GIS), Kellogg (K) and Del Monte Foods (DLM) also considered bids for the business (WSJ, full story).

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Comments

[johnnysize:]

Watch...another overplayed, overhedged exchange offer. With the volatility of the proration I believe those persons guessing how much KFT gets taken, and put back to you, and how much RAH gets given to you, will get smoked. This is the deal... I think arbs are too short RAH and too long KFT. After the announcement of prorate falls short of expectations, watch all the "pro's" chase RAH up to 60.

2008 Jul 28 10:47 AM