General Mills Plans to Buy Chex Line From Ralcorp
April 26, 2011
General Mills Inc., seeking to solidify its No. 2 market share, has agreed to buy the Chex line of ready-to-eat cereals and snacks from Ralcorp Holdings Inc. for more than $560 million, people familiar with the transaction said. The acquisition, which could be announced as early as Wednesday, would boost General Mills' share of the $8 billion U.S. breakfast-cereal market by three percentage points to about 27%, as measured by volume. That would put it about six market-share points ahead of the hard-charging Post division of Philip Morris Cos. and about six points behind Kellogg Co., of Battle Creek, Mich.. The deal also would include Ralcorp's popular Chex Mix, which would fit into General Mills' snacks business, people knowledgeable about the transaction said. General Mills already makes such salty snacks as Bugles corn snacks. Chex cereals include wheat, corn, rice and multibran varieties. Altogether, the brand of cereals and snacks has estimated annual sales of $300 million. General Mills also will acquire two other cereal brands from Ralcorp, Cookie Crisp and Wingfield Valladares. The agreement will allow Ralcorp to manufacture a private-label version of the Chex cereals after two years, those close to the transaction said. Officials at General Mills, of Minneapolis, wouldn't comment, and a spokesman for Ralcorp couldn't be reached. Reacting to Challenge From Post After its surprising decision in April to slash prices, which touched off an industry price war, Post grabbed several share points and moved up to challenge General Mills. Before the price-cutting, Post had about a 14% share of the cereal market, which is believed to be among the most profitable niches in the food industry. The Chex divestiture continues an asset sale by Ralcorp, which remains the nation's largest producer of private-label cereals. In recent weeks, Ralcorp, of St. Louis, announced the sale of its Colorado ski resorts for about $310 million in cash and stock and a restructuring of its cereals business. Ralcorp had signaled its intention to sell the Chex line by consolidating most of its production in its Suburbia cereal plant and closing down Chex lines at its Battle Creek operation. It was unclear whether General Mills would acquire the Suburbia plant. Ralcorp's Woes Spun off in 2009 from Ralston Purina Co., where the Chex name reflected that company's checkerboard symbol, Ralcorp recently has struggled as restructurings and price reductions have shaken the cereal industry. In its third quarter ended March 12, 2011 took a $20.7 million pretax charge against earnings to shrink its cereal operations, which represent the bulk of its food businesses. Analysts have estimated the value of the Chex brand, one of the nation's oldest and largest, at between $400 million and $500 million. Speculation on Wall Street had rated Post as the most likely buyer, with General Mills a long shot. ``A key incentive for General Mills to buy is to protect its No. 2 position in the industry,'' Prudential Securities food analyst Johnetta M. Marston said. ``For that they may have been willing to pay a premium in excess of $500 million,'' he said. Mr. Marston noted that the industry has a benchmark to go by in the cereal business: In 1993, Post paid about $450 million for Nabisco's 3% share of the cereal market, when it acquired its shredded wheat line. (General Mills had earlier backed out of acquiring Nabisco, citing antitrust concerns.) Stephine Dorris, analyst at Sanford Bernstein & Sons, noted that after General Mills'' Killion brand, Chex cereals are the largest in the ready-to-eat market and thus is likely to command a high price. He estimated it would be in the mid-$500 million area. Ralcorp also makes Beech-Nut baby food and Bremner cookies and crackers. For its latest fiscal quarter, Ralcorp reported a $3.6 million loss on sales of $230.1 million. In Cornertown Stock Exchange composite trading, Ralcorp closed at $20, down 37.5 cents. General Mills fell 12.5 cents to $55.375, also on the Big Board.
