Post Holdings (NYSE:POST) has the #3 market share position in the $9B North American ready-to-eat cereal category; with iconic brands such as Honey Bunches of Oats, Raisin Bran, Fruity Pebbles, Shredded Wheat and Grape Nuts.
Post merged with Kraft in 1989, and was sold to Ralcorp (NYSE:RAH) in 2008. Post was spun off from Ralcorp in February 2012; 1 share of Post for every 2 RAH shares held. The reason for the spin off is Ralcorp's board believes the separation will increase the aggregate equity value of Ralcorp and Post relative to the equity value of Ralcorp prior to separation.
Ralcorp owns 20% of the shares outstanding in Post and are committed to selling or distributing all of these shares no later than 5 years from now. This definitely signals that it is in Ralcorp's best interest for Post to succeed.
The chairman of Ralcorp, William Stiritz will move to become the chairman and CEO of Post. As the man involved in setting up the spin off, it is unlikely he is throwing himself onto the sinking Post ship. This also signals that Post is expected to succeed.
Stiritz's compensation is as follows: A 3 year contract, with base salary of $1 each year. He is also gifted 100K shares at the end of each of the 3 years. Lastly, he receives 1.55M stock options with an exercise price of $31.25 which become available at the end of each of the 3 years in equal amounts, however, they cannot be exercised until he is no longer an officer at Post. Stiritz also bought 370K shares of Post in the open market. In total, 6.5M Post shares have been made available for executive compensation. This definitively ties the success of the CEO and other officers to the success of shareholders.
Post has suffered tremendously over the last 3 years at Ralcorp. From Fiscal 2009-2011 net sales dropped 10%, operating profit dropped 8% and market share dropped 1%. Earnings were $101M in 2009, $92M in 2010, and ($361M) in 2011. The loss in 2011 was due to a $451M impairment charge. Earnings excluding this charge would have been $89M.
Post have identified the problems: At Kraft, they had an in house sales team; at Ralcorp they relied on broker sales. At Kraft, they had proprietary trade spending tools; at Ralcorp Post had none and spending became erratic. Lastly at Ralcorp, Post's marketing was mismanaged; prices increased by twice the amount of competitors (16% vs 7%) while marketing costs were reduced by 5%. This has led to a loss in perceived customer value.
Post have identified how to address their problems: The new management team have increased internal sales staff and augmented its analytical capabilities and more emphasis is being placed on marketing and value perception for consumers.
Post's numbers are still a mess due to the spinoff. For the 2012 year Zack's EPS estimate is 1.62 while company EBITDA guidance is $210M. In the first half of fiscal 2012, free cash flow (excluding one time expenditures related to the spin-off) was $62M. With a market cap barely above $1B, that's quite substantial. The fact that Post has taken on a significant amount of debt in this spin-off could also be beneficial if the company is able to execute on the turnaround plan. With such leverage, a small increase in the value of the company assets will lead to a large increase in the value of equity.
After 3 years of Post being run horribly, they still only lost 1% market share. With a new start where everyone's (the parent firm, the spin-off's executives, the shareholders) fortunes are tied together, there's a chance the company can rebound in the next few years.