ConAgra Foods, Inc.

acquires Ralcorp
Holdings Inc.
Kezia Toemion, Adi Trihamanto, and Gary Tanoesoedibjo
Mergers and Acquisitions
Professor Officer
4/27/15

Executive Summary
Based on our analysis of ConAgras stand-alone prospects and industry
dynamics, along with Ralcorps valuation and synergies, we believed that the Ralcorp
acquisition is preferable compared to other options. The ConAgra/Ralcorp deal is
expected to result in the biggest acquisition in ConAgra history as ConAgra is acquiring
the largest private label food manufacturer in the US for $90 per share in cash. This
acquisition will result in the creation of one of the largest North American packaged food
business. In addition, this transaction will leverage its capabilities and accelerate
ConAgras recipe for growth strategy, which are growing its core business and entering
into adjacent categories. Overall, this acquisition will result in combined total sales of
$18 billion.
With this transaction, the combined business will create the largest private label
food company in the US, with sales of around $4.5 billion annually. The private label
food segment represents 18% of total sales in the packaged food industry. The segment
also has a consistent growth rate. This acquisition is preferable compared to an organic
growth. As a stand alone, ConAgra only has total sales of $950 million in the private
label sector. With organic growth, ConAgra will only be able to grow this number by a
small percentage. However, with this acquisition, ConAgra is able to quadruple their
private label sales. This allows ConAgra to capitalize on the long-term growth that this
segment will provide. Hence, achieving their recipe for growth strategy.
Moreover, Ralcorp is a good fit for ConAgra because they both do not have a lot
of overlap in terms of the products they sell. This also complements ConAgras strategy
to grow into adjacent categories. For example, ConAgra is not in the nutrition bar
segment that is a $1 billion industry. Ralcorps main products include nutrition bars and
other breakfast foods that ConAgra is not in. This will allow ConAgra to enter into these
adjacent categories and also capitalize on its growth.
Furthermore, Ralcorp is more attractive than other potential targets because of
the goals and synergies Ralcorp will bring to ConAgra. First, they are the leader in
private label food offerings. In addition, Ralcorp will give access to new consumers,
which are the big retailers such as Trader Joes Co and Costco Wholesale Corp.
Furthermore, with ConAgras infrastructure and productivity capabilities, this acquisition
will provide cost synergies of $225 million annually, which will be fully realized after the
fourth full fiscal year after closing. These cost synergies are mainly from supply chain
and procurement efficiencies. Other values that Ralcorp will bring include robust sales
and marketing functions, research and innovation, and a strong workforce that includes
management team with deep industry experience
The acquisition of Ralcorp by ConAgra is worth approximately $4.95 billion with
the addition of around $1.8 billion in debt. In terms of its resource/capability evaluation,
it is worth noting that the majority of the cash offer will come in the form of outside
financing. ConAgra has cash on hand of roughly $972 in 2011. This cash balance will be
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used to finance the deal in part but it is important to note that ConAgra must maintain a
healthy cash balance in order to account for anomalies or other risk factors. Taking this
into consideration, it is reasonable for ConAgra to finance roughly $800 million of the
$4.95 billion cash deal from its own balance. The remaining will be in the form of bridge
financing as well as the issuances of new shares and other LT-debt instruments.
There are multiple integration problems that arise from the acquisition. Missed
targets is a problem whereby ConAgra faces the challenge of keeping track of the
synergy targets and as a result, fail to realize the full potential of the synergies. Another
problem that may arise is the loss of key people as a result of lagging behind in setting
up managerial structures following the acquisition. Another problem that managers fail
to act quickly upon is corporate culture conflicts that may arise as a result of the
integration of the two firms. ConAgra faces the challenge of losing key people as well as
a result of this and must therefore not be taken lightly when tracking integration process.
Another common problem that ConAgra must take into account is poor performance in
key business as a result of integration. Sometimes companies can be too caught up in
the integration process that it steers them away from the core business and this may
result in various operational and managerial problems.
ConAgra can solve these issues by having an integration plan well in advance
and being able to actively track the progress will also allow ConAgra to successfully
measure its integration success. It can also reduce culture conflicts by explicitly
addressing it and following a specific culture instead of trying to merge the two different
cultures. This will result in the loss of key people but in the long run will create less
conflict and solidify the integration process. Lastly, being focused on its core business
will reduce the risks of poor performance in the business.

Acquirer Stand-Alone Prospects and Industry Dynamics

Industry/Market Definition
ConAgra Foods, Inc. is an American packaged foods company. According to the
companys 10-K, ConAgra has consumer products in 97% of Americas households
sold in grocery, convenience, mass merchandise, and club stores (ConAgra Foods
Inc., 2012). The company is in the processed and packaged foods industry with two
reporting segments, which are Consumer Foods and Commercial Foods. In 2012,
Consumer foods and Commercial Foods provided 63% and 37% of the companys net
sales respectively.
The companys Consumer Foods segment makes and sells leading branded,
private label and customized food to retail and foodservice channels (ConAgra Foods
Inc., 2012), mainly in Northern America. This includes brands such as ACT II, Banquet,
Blue Bonnet, Crunch n Crunch, Healthy Choice, Hunts, PAM, Swiss Miss, Reddiwip,etc. In 2012, store brands netted $632 million, about 8% of Consumer Foods total
net sales. (ConAgra Foods Inc., 2012)
Commercial Foods segment makes and sells a variety of specialty food and
ingredients to restaurants, foodservice operators and other food makers around the
world (ConAgra Foods Inc. 2012). Major brands include Lamb Weston, which is the
leading producer of quality-frozen potatoes, sweet potatoes, appetizers, and other
vegetables; ConAgra Mills, provides multi-use flours, etc.
In 2012, the year of the merger, the industry players and ConAgras major
competitors were PepsiCo Inc., Tyson Foods Inc. Nestle, and Kraft Foods Inc. with food
sales of $37.6B, 31.6B, 27.2B, 21.0B, and 16.0B respectively. ConAgra was ranked
number 12 with total food sales of $10.3B. (Food Processing, 2012)
The food processing industry had 83 total mergers in 2012 and 79 in 2011.
Around this time one of the biggest mergers was Kellogg Co.s purchase of Procter &
Gambles Pringles brand. This provided them with $1.5 billion in sales globally. Another
merger & acquisition was Campbell Soup Co. acquired Bolthouse Farms for $1.55
billion in cash. General Mills had three deals, which included acquisition of the Food
Should Taste Good snack brand domestically, and two others internationally. B&G
Foods Inc. acquired the New York Style and Old London brands from Chipita America,
Inc. for $62.5 million in cash. As for ConAgra, the company bought the Bertolli and P.F.
Changs Home Menu frozen meals businesses from Unilever PLC for $267 million as
well as Odoms Tennessee Pride and Kangaroo Brands. (Food Processing, 2012)

External Analysis
Competition among existing firms
There is an intense competition in the packaged and processed foods industry.
Industry leaders as mentioned before include PepsiCo, Tyson Foods Inc., and Nestle,
have almost triple of ConAgras total food sales in 2012. As a result of high competition,
there is a lack of differentiation or switching costs between products. At the same time,
ConAgra has name brands that customers are loyal to such as Healthy Choice, etc.
Overall, high competition will create overall lower industry cash flows and profitability
because everyone is competing to give the lowest price possible with maintaining good
quality and food safety.
Potential for new entrants
As for new entrants, the potential is pretty low because of the competition and
scale of the big producers that already exists in the industry. Moreover, the current
companies occupying the industry already have first-mover advantage in the market.
This makes it more difficult for new companies to get a good share of the industry and
compete in the market. The potential for new entrants will not really be a big influence
on overall industry cash flows and profitability because new companies will only take
shares of competitors but the overall cash flow will remain the same.
Potential for substitute products
The packaged and processed goods industry has many good substitute products
for customers to choose from. This limits the prices that ConAgra can charge for their
products because higher prices might drive customers to switch to other brands and
products. Although ConAgra has high quality products, other substitutes in the industry
also have similar quality products. More specifically, private label brands have similar
quality products with lower prices. Moreover, according to the net sales of competitors,
substitutes have relative performance as compared with ConAgras products. This will
also affect cash flows and profitability in the industry negatively.
Bargaining power of suppliers
Suppliers also have a high bargaining power in the processed and packaged
foods industry. These suppliers are the farmers. There are substitute products in this
industry, however it is difficult to foster a long-term relationship with suppliers especially
because the big companies already have good relationships with suppliers. As a result,
the cost would be pretty high to switch suppliers.
Bargaining power of customers
The main customers of ConAgra are the big retailers that carry their products for
final consumers. These retailers are like Target, etc. They buy in large orders, which

allows for lower prices in bulk. This hurts the companys profitability because retailers
also have to make profit from the sale. Moreover, ConAgra products account for a major
percentage of the retailers costs. There is also high availability of substitutes for
retailers to purchase if they do not like ConAgras price. As a result, there is a threat of
backward integration with these big retailers.
Bargaining power of labor force
There are more and more workforce in the processed and packaged foods
industry that are in unions. This creates for increasing bargaining power of labor force.
With increasing demands from workers, it overall affects industry profitability negatively
as well because there will be higher expenses.
Degree of government regulation
There is a high degree of government regulation by the US Food and Drug
Administration (FDA). This is because the quality and safety of food is critical to the
health and wellbeing of consumers. Hence with the high risk to the public, the
government regulation is high. As a result there is a high standard that products have to
pass. This will also negatively affect industry profitability and cash flow because
companies have to continuously increase or maintain high quality products while having
high price-cutting competition.
Global exposure
Global exposure may also affect a companys profitability especially if a company
is a global company. Multinational companies have to worry about foreign sales, extent
of operations, exchange rate, volatility, and political risks. If a company main source of
income is domestic, global exposure will not negatively affect industry profitability/cash
flow and vise versa.
Internal Analysis

Strengths
Brand portfolio
Research and development/Innovation
Food safety leadership
Workforce
Supply chain expertise
Partnerships
Financials

The first main strength of ConAgra is its brand portfolio. As discussed previously
ConAgra has numerous Consumer Foods and Commercial Foods brands. As a result,
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customers may think that they are all buying different brands, but they are actually all
purchasing from one food processing company, ConAgra. This market penetration
provides the company with high source of income. Hence if one brand is not successful,
it is compensated by other brands. The success of all of these brands contributes to the
success of ConAgra and the companys financials and relationships with consumers.
Second strength of the company is Research and Development. From the
companys 2012 10-K, ConAgra emphasizes, applied and technical services directed at
product improvement and quality control (ConAgra Foods Inc., 2012). Moreover, they
also pride themselves in conducting research activities related to the development of
new products (ConAgra Foods Inc., 2012). This allows ConAgra to be a competitive
force in the industry and not fall behind of competitors.
Another strength is food safety leadership. In 2011 ConAgra earned the Quality
Achievement Award for manufacturer of the year from the Safe Quality Food Institute
(ConAgra Foods Inc., 2012). This strength is tied together with the companys
workforce. The main company values are trust and empowerment. They believe in the
importance of embedding knowledge, tools, and sense of ownership employees need in
order to ensure highest possible levels of food safety. This sense of ownership of the
company allows the employees to produce high quality products for the consumers.
Moreover, the company also has a strong supply chain expertise. Its supply chain
team manages the production, packaging, and fulfillment of the consumer and
commercial food worldwide. Key functions of this are continuous improvement, contract
manufacturing, customer supply chain, engineering, environment, health & safety,
logistics, operations, etc. (ConAgra Foods Inc., 2012). This is one of the drivers that
make ConAgra Foods one of the leaders in the industry.
ConAgra also has strong partnerships. The company has a lot of retailers that
sell its goods that has helped the company reach millions of homes. The company also
helps these retailers with in-house capabilities, solutions, and insights to help them
grow their business (ConAgra Foods Inc., 2012). For example, in 2012 Target named
ConAgra vendor of the year for 2 consecutive years.
Furthermore, ConAgra has strong sustainable and growing financials. In 2012,
the company increased net sales by nearly 8%. ConAgra also generated $1 billion in
cash flows from operations and raised annual dividend by 4% (ConAgra Foods Inc.,
2012).
Weaknesses
-

Pricing power
Low international presence
Bad acquisitions

The first weakness is ConAgra does not have a major pricing power because of
the industry they are in. With such high competitors, it makes it hard for ConAgra to
increase prices as there are a lot of substitutes out there for consumers. According to
the companys 10-K, in most product categories, ConAgra competes not only with other
widely advertised branded products but also with private label products that are
generally sold at lower prices. This along with bargaining power of consumers and
suppliers create a weakness in pricing power for the company.
Another weakness is low international presence. The company only has 10% of
its sales internationally. This reflects on its financials as compared to other global
brands such as PepsiCo. The companys main international sales are only from Canada
and Mexico. ConAgra is very selective in choosing international markets. This creates a
weakness in the company because other competitors are taking advantage of growing
international markets.
The company also has old acquisitions that have performed badly. Some brands
that do not meet the companys strategic objectives, growth, or profitability targets
become a weakness in the companys financials. A lot of these end up with divestitures
with terms that are unfavorable to the company.
Opportunities
-

Grow core business/R&D

New markets/adjacent categories
International expansion
Mergers and acquisitions

The first opportunity is to continue to grow its core business. This is one of its
main strengths discussed prior. With a good brand portfolio and emphasis on research
and development, ConAgra should continue to leverage innovation and marketing to
grow existing businesses. This is also an opportunity because of low potential entry
discussed previously. With low companies entering the industry, there is more
opportunity for ConAgra to grow in this industry.
ConAgra also has an opportunity to enter into adjacent categories or new
markets. As discussed in the 10-K, ConAgra focuses on expanding into faster growing
adjacent categories. This will provide more sources of income and increase cash flows
to the company. For example, ConAgra wants to enter the energy bars category. The
nutrition bars industry is a $1 billion industry and is the fastest growing protein and meal
replacement bar category. The company is already planning to produce nutrition bars for
two major retailers. As a result, the company can leverage their private label strengths
mentioned previously to increase its value-added growing categories.

Another opportunity is expanding internationally. This was one of the weaknesses

described earlier. As of 2012, ConAgras international business is about 10% of the
sales (ConAgra Foods Inc., 2012). This was also one of the companys strategies from
the statement to shareholders, which was to expand international footprint. ConAgra
has aggressive growth plans in emerging markets such as Asia, the Middle East and
Latin America.
Moreover, another opportunity for ConAgra is mergers and acquisitions that may
strengthen the companys stake in the industry. Especially in brands that ConAgra is not
dominant in. This will increase the companys competitive advantage. Moreover, it will
increase cash flows from additional brands. For example, from the companys annual
statement to shareholders, the CEO said that salty snacks are growing rapidly.
November 2011 acquisition of national pretzel company brought 200 million in net sales
in the private label pretzel category, which grew more than 9% last year. As a result, this
is another opportunity that ConAgra should look into.
Threats
-

Competition
Government regulation
Substitute products
Customer and supplier relationships
Changing in economy

Intense competition is a major threat to ConAgra. As discussed earlier industry

leaders have almost triple food sales compared to ConAgra in 2012. Therefore, there is
always a threat that competitors will produce better quality products and cheaper prices
for consumers to switch to. This will affect the companys sales and profits due to loss of
market share and pressure to price cut.
Another threat that was discussed earlier is government regulation. There is such
a high standard for food safety and quality because the risk it has to the public. The
company may encounter lawsuits and fines. ConAgra has to be very careful in
producing foods to make sure that it is safe for the public. If they do not produce good
quality foods, there is a risk of product liability claims and product recalls. This comes
with a cost, which will reduce companys profitability.
Substitutes are also a threat as discussed in potential for substitute products
earlier. With high substitutes with similar products and quality in the market, it creates a
threat to ConAgras profit. ConAgra needs to have a competitive edge that separates
their products to competitors because the cost of switching products is very low.
Customer and supplier relationships are another threat of the business. As
discussed in the bargaining power of these two stakeholders earlier, it shows that they

have a high bargaining power that becomes a threat to ConAgra. For example, in 2012
Wal-Mart accounted for around 17% of ConAgras net revenues. So if in the future, WalMart decides not to purchase from the company anymore, it will significantly affect the
success of the business. Moreover, disputes of pricing and performance with suppliers
will affect the companys ability to supply products to customers.
Lastly, volatility in financial markets and economic conditions and changing
commodities prices will also threats to the company. Changes in economic conditions
will affect consumer behavior, demand for products, and costs. Hence if the economy is
down, it will reduce the companys sales and profit. Also the company relies heavily of
commodities such as wheat, corn, oats, beef, pork, poultry, and energy. The prices of
these raw materials are also subject to market fluctuations. Hence if these costs
increase, it will increase operating costs of ConAgra and overall decrease profit.
ConAgras Stand-Alone Valuation
ConAgras stand-alone valuation is $14,724,714,050 (Exhibit1). We calculated
this number based on the following assumptions. For the calculation of cost of equity,
we found a market risk premium of 7.5%, beta of 0.8, and a risk-free rate of 1.79%
based on US ten-year bond at 2012. This resulted in a cost of equity of 7.79%. For cost
of debt we got 3.37%. In November 2012, ConAgra has Market Value of Equity of
$11.4B and Book Value of Debt of $2.86B, which resulted in a 80% equity and 20% debt
structure in the company. Furthermore, we used a tax rate of 34% and that got us a
Weighted Average Cost of Capital of 6.68%. To get the predicted growth rate for the
forecast period, we got that number 4.88% based on ConAgras historical growth rate
from 2007-2012. For the terminal growth rate we used a 2% rate. We got the financial
information of the company through Mergent Online.
Acquisition Plan
Strategy
The acquisition of Ralcorp, will enable ConAgra to best implement its recipe for
growth strategy, which are1) growing its core business and 2) entering into new
markets/adjacent categories.
Ralcorp is also a manufacturer of food products. According to the companys
2012 10-K, Ralcorp is a leading supplier of private brand food products to the
foodservice channel (Ralcorp Holdings, Inc., 2012). More than 90% of the companys
products are sold to customers within the United States. Moreover, Ralcorp
manufactures and markets emulations of various types of branded food products that its
retailers sell under their own store brand or under value brands. Ralcorp attempts to

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manufacture products that are at least equal in quality to the corresponding branded
products (Ralcorp Holdings, Inc., 2012).
From Ralcorps company overview, the main business operation is similar to
ConAgra, although it carries different food types. ConAgra also supplies private brand
packaged food to retailers in their Consumer Foods market. However, this segment of
the company can grow tremendously with the acquisition of Ralcorp, as Ralcorp is the
leader in the private label area. In fact, buying Ralcorp will more than quadruple
ConAgras private-label sales to $4.5 billion. Hence this acquisition will further grow
ConAgras first strategy of growing their core business.
Moreover, Ralcorps major label offerings include cereal, pasta, crackers,
nutritional and cereal bars, jellies and jams, syrups, frozen waffles, etc. This shows that
Ralcorp has products that are in the adjacent categories that ConAgra is not in. As
mentioned earlier, one of the strategies of ConAgra was to enter into the energy bars
category, as it is a $1 billion industry. As a result, this will also help ConAgra into
achieving its second opportunity of entering into new market/adjacent categories.
As for the third strategy of merger & acquisition, this acquisition definitely enables
ConAgra to best implement its strategy. This acquisition will serve ConAgra best as
opposed to organic growth or partnership because as described already, Ralcorp is the
leader in the private business, hence this will catapult ConAgra to achieve its strategies
quicker.
Goals and Synergies
ConAgras acquisition of Ralcorp will achieve several goals and synergies. The
first goal is that the combination of these companies will increase sales, operating
margin, and EPS. This transaction will specifically have combined sales of
approximately $18 billion annually, making it one of the largest packaged food
companies is North America. This acquisition will also make ConAgra the largest private
brand packaged food in North America. This is because with ConAgras $950 million in
existing private label business, combined with Ralcorps private brand sales, it will total
$4.5 billion in sales annually. Therefore, this transaction will allow ConAgra to have a
leading stake in the growing sector. The private label sector has grown from 16.4% to
18.9% of sales in the supermarket channel in the last five years. Overall, the combined
company will have 50% retail brands, 25% commercial/foodservice, and 25% private
label of total sales. All of these support the strategies of growing its core business and
entering branded adjacent categories described earlier.
Moreover, according to Gary Rodkin, CEO of ConAgra, Ralcorp will give
ConAgra access to new customers. These retailers include Trader Joes Co. and Costco
Wholesale. He also mentioned that another synergy from this acquisition is in the areas
of supply chain management. Specifically, ConAgra will achieve an estimate of $225
million of cost savings synergy annually by the fourth full fiscal year after closing as they
11

leverage existing infrastructure and productivity capabilities. Lastly, this acquisition will
enhance ConAgras research and development.
Resource/Capability Evaluation
Before the Ralcorp acquisition, ConAgra was primarily focused on branded
packaged goods. These brands are mostly second and third tier brands. The Ralcorp
acquisition made ConAgra more of a hybrid company. It substantially increased its
revenue from private label foods, selling under supermarket names. Although most
companies sell branded packaged goods or private label foods, the fact that ConAgra
had integrated the two and decided to sell both might prove to be an opportunity and a
challenge for them.
Based on ConAgras financial position in 2011, it has an EPS of 1.88, whereas in
2012 the value dropped to 1.12. While posting reasonable net income for the year
ending 2012, the drop in EPS signals the issuance of new shares, which are used to
finance the Ralcorp acquisition. ConAgras cash on hand for the year ending 2011 was
$972million, of which by year ending 2012 that number fell to $103million. ConAgra
does not have the cash on hand available to finance the acquisition on its own, and
requires a mix of financing strategies to come up with the cash offer.
Of the $4.95billion cash offer that ConAgra has to come up with, only a portion of
it will come from its cash reserves. ConAgra will have to keep a cash balance to equate
for risk factors that may arise in the future, therefore it cannot deplete itself of its cash
on hand. Of the $4.95billion, ConAgra would need to finance roughly $800million from
its available cash while the rest will be in the form of borrowings under its existing credit
facilities and new long term debt. ConAgra before the deal has a debt to equity ratio of
around 0.64. The deal is expected to be financed heavily through the use of debt
instruments primarily in the form of bridge financing. This will be the bulk of where the
cash will come from.
Ralcorps Stand-Alone Valuation
Ralcorps Stand-Alone Valuation is $4,297,863,680 (Exhibit2). We calculated this
number based on the following assumptions. For the calculation of cost of equity, we
found a market risk premium of 7.5%, beta of 0.71, and a risk-free rate of 1.79% based
on US ten-year bond at 2012. This resulted in a cost of equity of 7.11%. For cost of debt
we got 3.37%. In November 2012, Ralcorp has Market Value of Equity of $3.9B and
Book Value of Debt of $1.9B, which resulted in a 66.82% equity and 33.17% debt
structure in the company. Furthermore, we used a tax rate of 34% and that got us with a
Weighted Average Cost of Capital of 5.49%. For predicting the forecasted growth rate,
the 8.94% number that we got was based on Ralcorps historical growth rate from 20072012. For the terminal growth rate we used a 2% rate. We got the financial information
of the company through Mergent Online.
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Purchase Price Estimate

The absolute minimum offer price that ConAgra should offer to acquire Ralcorp is
whatever the closing price is before the merger happened which was around $71.78
[November 21 2012 price]. However, based on our calculation, we got a stand-alone
valuation of Ralcorp of $4.3 billion. This puts a minimum offer price of $78.13 per share.
Furthermore, this offer price does not include the synergy that ConAgra expects to
receive from this acquisition.
The synergy that ConAgra will get from acquiring Ralcorp is a $225 million in cost
savings annually realized by fourth year. There was no information for revenue
enhancements that this transaction will bring. If this was the case, then ConAgra can
expect to see a present value of synergy of around $2.4B (Exhibit3). This puts Ralcorp
with a total valuation of $6.7B. Therefore, the absolute maximum price that ConAgra
should offer to purchase Ralcorp is $121.75. However, if they do offer this price, then
ConAgra will not benefit from this acquisition at all because the total value and
synergies will offset the purchase price. Thus, ConAgra should put the offer price
between the two, which is around $95.
These synergy numbers are only forecasted numbers by analyst and will not be
fully known until the acquisition actually takes place. Therefore, the lower that ConAgra
can purchase Ralcorp for, the higher the synergy that it will benefit from. These synergy
numbers are based on the assumption that there will be continued high growth in the
private label industry. Thus any fluctuations in the conditions of the industry will impact
the value. If the growth in fact is lower than the prediction, this will greatly reduce the
value of the synergies. Other factors that will alter the value are regulatory approvals,
ConAgras ability to integrate successfully, availability and prices of raw materials, future
economic changes, the competitive environment, expected timing of the completion of
the transaction, future business plans, and prospective performance and opportunities.
Offer composition
ConAgra foods offer of $90 in cash per share of Ralcorp common stock was a
cash offer that was made on the 27th of November 2012. In terms of the composition of
the offer price, it is justifiable to have an all cash offer because of the nature of the deal.
The acquisition requires ConAgra to increase its level of debt. ConAgra has total
liabilities of $14billion, compared with its total assets of $19.4 billion. This increases
ConAgras total liabilities by 12% as financing the debt increases the ratio of liabilities to
assets from 60% to 72% if the deal was to be financed through debt. Although ConAgra
would stretch its balance sheet in order to make this cash offer finalized, it is a logical
approach since Ralcorp has been dodging the acquisition for quite some time. Cash
offer would be the simplest way to finalize the acquisition as roles of the two parties are
13

clear-cut and the exchange of money for shares completes a simple transfer of
ownership.
In terms of meeting the primary needs of the shareholders, the cash deal would
increase the shareholder value added (SVA) of the acquiring shareholders. This
difference between the estimated value of synergies and the acquisition premium would
be fully realized in a cash deal, thus making it beneficial for the acquiring firm. If the deal
was to be a mix between lets say cash offer and stock swaps, the full SVA amount will
not be realized, as this will be shared between the buyer and seller. This offer would
justify the need for a cash deal, as it would benefit the acquiring firm. However,
ConAgra needs to assess its future plans moving forward as this added benefit could
also be a weakness. A cash offer would increase the shareholder value at risk (SVAR)
as the acquiring firm carries this burden. This is not the case in a stock swap scenario
where both parties are accountable.
Financing Plan
ConAgra must finance the proposed offer through a series of debt/equity mix.
ConAgras Cash on hand for the year ending 2012 was $103million, and since the
Ralcorp deal was a cash acquisition, it will require financing on its part to complete the
deal.
It will be financed through a series of available cash on hand, existing credit
facilities, and new borrowings. Bank of America, N.A and Merril Lynch, Pierce, Fenner &
Smith Inc, has committed to providing $4.5billion in bridge financing and a $1.5billion
senior unsecured term loan. This $6billion financing commitment will be used to
purchase Ralcorps $5billion equity, valuing the deal to $6.8billion, including debt.
ConAgra has had a historical debt:equity ratio of around 0.6 over the past five
years, and the financing plan will have some effect on the firms credit rating due to the
borrowing nature of the deal. However, we believe that this will not endanger the firms
credit worthiness. ConAgra is the leader in the packaged foods industry and has kept a
healthy financial standing. The acquisition of Ralcorp is justifiable in order to solidify
ConAgras place in the market and public reactions has generally been favorable. That
coupled with the healthy financial standing of the company will reassure investors that
the financing plan will not erode the company of its creditworthiness.
Potential Integration challenges
Missed targets:
One of the biggest challenges with an M&A deal is the inability/failure to clearly
define the deals primary source of vale and its key risks. This leads to the problem of
not being able to set clear priorities for integration. The ConAgra/Ralcorp deal is
expected to create one of the largest packaged food companies in North America, with
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sales of approximately $18 billion annually with a sales force of more than 36,000
employees. The problem that might arise with the ConAgra/Ralcorp deal is that these
two companies are focused in their own respective markets and by entering the two
markets it might create disruption as the focus is now shifted to both areas. Because the
ConAgra deal is an all cash offer rather than a stock swap or through other means, the
burden lies with the acquiring firm to make sure the acquisition is in line with the
synergy goals. With the case of a stock swap, it give assurance that the seller hold
some form of accountability to make sure that the synergy targets are met.
Loss of key people:
The acquisition of Ralcorp means that it will lose some key people within the
organization. Although it is inefficient to keep all of the workforce after the merge, it is
difficult for ConAgra to know with certainty the missed opportunity from letting go of
some of its workforce. Many companies also wait too long to put new organizational
structures and leadership in place after a merger/acquisition deal. If ConAgra fails to put
a new organizational structure in place, it may result in the loss of key people who will
seek other alternatives.
Corporate culture conflict:
ConAgra might operate differently than Ralcorp in terms of their office culture and
this disruption may result in conflicts within the organization. If ConAgra fails to address
cultural matters early on into the acquisition it may result in talented people from within
the organization to leave the company
Poor performance in the base business:
There may be some confusion early on in the integration process. Integration
may take up too much managerial time and might result in the poor performance of
managers, which will affect the companys bottom line. Integration might take too much
energy and attention, distracting sales forces from the core business. Furthermore,
uncoordinated actions or poorly managed systems may result in active interference with
the base business. ConAgra must make sure that it does not for example, conduct
multiple communications with customers, an error that might arise due to the integration
of the two companies. Competitors may take advantage of this confusion and this must
be addressed early on in the integration process.
Solution:
Mismanagement could be prevented by having a clear transition plan. Goals
should be explicitly stated and both the acquiring firm and the seller must work together
to reach synergy targets. ConAgra can achieve this by focusing on an integration plan
and might consider having an integration program office that handles the day-to-day
transition in the early stages of the acquisition to make sure that integration is
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successfully done and synergies are met. Integration must be done immediately after
the deal to avoid confusion. Prolonging the plan will lead to the loss of key people as
mentioned above.
ConAgra must also commit to one culture by focusing on its own set of norms,
values, and assumptions that governs how the people within the organization interact.
Culture must be managed actively and conflict resolution must be a priority early on in
the integration process. As the cultures from the two companies clash, it is important
that it be resolved quickly to avoid escalation. The loss of work force is expected due to
this, but the extent of the turnover can be managed by an effective use of an integration
plan.
Furthermore, ConAgra must maintain momentum the base business of both
companies by monitoring their performance closely. Integration is important, but
financial performance is the bottom line and therefore need to be addressed actively.
Therefore, it is important to monitor the base business closely throughout the integration
process.
With regard to the purchase price, ConAgra paid a fair value for Ralcorp due to
multiple reasons. First of all, although the fundamental value of equity is valued at
roughly $4.3 billion, the synergies created by the integration will result in ConAgra being
one of the largest North American packaged food companies and the largest North
American private label packaged food business. The deal, which is valued at $6.8
billion, including the assumption of debt, will create significant synergies in its combined
operations. It will significantly reduce its operating expense and increase efficiency
through the combined reach of both companies. It will expand its product portfolio as
well as giving greater bargaining power to distributors due to its size and variety in
product lines.

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References:
Bloomberg.com. Bloomberg, 27 Nov. 2012. Web. 23 Apr. 2015. Retrieved from
http://www.bloomberg.com/news/articles/2012-11-27/ConAgra-to-buy-ralcorp-for6-8-billion-including-debt
ConAgra Foods, Inc. (2012). Annual report 2012. Retrieved from
https://materials.proxyvote.com/Approved/205887/20120727/AR_138143/HTML2
/default.htm
ConAgra Foods, Inc. (2012). Form 10-K 2012. Retrieved from Mergent Online
database.
ConAgra. "Investor Relations and Investor Information | ConAgra Foods."
ConAgrafoods. ConAgra Foods to Acquire Ralcorp, the Largest Private Label Food
Manufacturer in the U.S., for $90 Per Share in Cash. Retrieved from
http://www.ConAgrafoods.com/news-room/news-ConAgra-Foods-to-AcquireRalcorp--the-Largest-Private-Label-Food-Manufacturer-in-the-US--for-90-PerShare-in-Cash-1761910
"Food Processing." Mergers and Acquisitions Report 2012: Despite Uncertain Times,
Asset Swapping Continues. Retrieved from
http://www.foodprocessing.com/articles/2013/mergers-acquisitions-report/
"Food Processing." Top 100 Food and Beverage Companies for 2012. Retrieved from
http://www.foodprocessing.com/top100/top-100-2013/
Stanford, Duane. "ConAgra Agrees to Acquire Buy Ralcorp for $5 Billion."
Ralcorp Holdings, Inc. (2012). Form 10-K 2012. Retrieved from
https://www.last10k.com/sec-filings/rah
Research, Zacks E. "ConAgra Acquires Ralcorp." Yahoo Finance. N.p., 31 Jan. 2013.
Web. 27 Apr. 2015. Retrieved from http://finance.yahoo.com/news/ConAgraacquires-ralcorp-201846592.html

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