September 20, 2011 9:01 pm

Ralcorp / ConAgra: rich offer spurned

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Share price must increase by 35 per cent before investors break even

You can do whatever you want, but you won’t make me talk. Fortified by a staggered board, tough takeover rules in its home state and, for good measure, a “poison pill” defence that it initiated in May, Ralcorp spurned a rich cash takeover offer from rival ConAgra, refusing even to discuss it.

Company managers set all sorts of yardsticks for themselves but, for the foreseeable future, Ralcorp’s shareholders can focus on just one: the $94 a share bid their board rejected. With some analysts reckoning ConAgra might have gone as high as $104, management has to boost the share price by 35 per cent before investors break even in terms of value creation. That is an awfully high hurdle and the one idea Ralcorp came up with to bridge the gap – spinning off or selling the Post cereal business it bought just three years ago from Kraft Foods – is unlikely to do the trick. The explanations for why it would are that Post has hidden value or that Ralcorp would fetch a higher multiple without a branded business that dilutes its generic core.

Though ConAgra never got the option of initiating a hostile bid, leading proxy advisory firm Institutional Shareholder Services, which gives unbiased opinions on such matters, took the unusual step of commenting anyway. Its view was scathing, saying that Ralcorp created the impression of a “desire of incumbent directors to keep a good thing going for themselves”. ISS already had an unfavourable view of Ralcorp’s executive compensation. Between them, Ralcorp’s two “co-CEOs” made over three times as much last year as Conagra’s chief, who runs a company twice the size.

There would be more outrage if Ralcorp had not outperformed the food industry in recent years with its focus on private labels. That was what attracted ConAgra, but it is not a licence to treat a public company as a private fiefdom.

E-mail the Lex team in confidence at lex@ft.com

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