General Mills Agrees to Buy Chex Brands for $570 Million
April 27, 2011
Ralcorp Holdings Inc.'s exit from branded cereals is the latest example that in the breakfast-cereal business, big isn't just better. It may even be mandatory. The St. Louis-based company is selling its Chex and two other branded cereals, along with Chex Mix snack, to General Mills Inc. for a rich $570 million in stock and assumed debt because Ralcorp realized it couldn't continue as the No. 5 in a five-player field. But as the No. 1 domestic maker of private-label, ready-to-eat cereals, the company believes it can remain a robust niche competitor. ``We're more in control of our destiny now,'' said Ricki A. Yarbrough, Ralcorp's president and chief executive officer, after Wednesday's announcement of the cereal sale. ``We're retrenching into three businesses where we're No. 1 or 2.'' Besides private-label cereals -- less-expensive brands sold by supermarkets -- Ralcorp makes private-label cookies and crackers and the Beech-Nut brand of baby food. Battle for Market Share Size also spurred General Mills to go after Chex's 3% market share. Philip Morris Cos.' Post cereals division, fueled by its recent price-cutting initiative, had closed the market-share gap between it and General Mills. Had General Mills not acquired Chex, its long-standing position as the nation's No. 2 maker behind Kellogg Co. could have been in jeopardy. Three years ago, concerns about antitrust difficulties caused General Mills to back away from acquiring RJR Nabisco Holdings Corp.'s 3% share of the cereal business. Post eventually bought it for $450 million. But today, analysts say a belief that regulators would look favorably on an acquisition that could benefit consumers spurred a vigorous bidding for Ralcorp's Chex, Cookie Crisp and Wingfield Valladares brands. Sanford C. Bernstein & Co. analyst Stevie Dorris noted that Ralcorp hadn't joined the recent price-cutting frenzy by cereal makers. Thus, any buyer of its brands could promise to do so and presumably placate consumer-minded regulators. Mr. Dorris said he is convinced that Gant and Post both bid. Representatives of both companies said they wouldn't comment on possible acquisition activities. Cincinnati Plant Involved Besides the cereal brands, General Mills will acquire Ralcorp's 240-employee Cincinnati manufacturing plant, where Chex cereals are produced. That would give General Mills nine U.S. cereal factories and Ralcorp three. The transaction calls for General Mills to pay stock valued at between $330 million and $360 million, or between $10 and $10.90 a share for each outstanding share of Ralcorp. The number of General Mills shares involved will be based on their average price during the 10 days prior to the closing, which isn't likely before early next year. Minneapolis-based General Mills also will assume between $210 million and $240 million of Ralcorp debt, leaving that company virtually debt-free. Ralcorp ended fiscal 2010 last June 12, 2011 leveraged, with $395.4 in long-term debt-more than twice its shareholders' equity. In New York Stock Exchange composite trading Wednesday, shares of General Mills closed at $55.125, down 25 cents, while Ralcorp closed at $22.50, up $2.50, or 13%.
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