Is ‘taciturn’ Ralcorp acting in its shareholders’ best interests?

ISS merger & acquisitions (M&A) director Chris Cernich was speaking to FoodNavigator-USA after publishing a controversial note entitled ‘Ralcorp - Is There Really Nothing Further to Discuss​?’

The note – co-authored by Nelson Seraci – was written after Ralcorp rebuffed the advances of ConAgra Foods for the third time ​and insisted that its plan to spin off its Post cereals business offered shareholders greater value, leaving the two firms with “nothing further to discuss”. ​

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‘It is not enough to say ‘no’ and nothing else …’​

Said Cernich. “We’re not saying the board should have recommended the offer. We’re pointing out that it’s critical for shareholders to understand why the board believes there’s a path to higher value available, particularly when the ConAgra offer would seem to present such a steep premium to the company’s unaffected market value.”​

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The fact that in rejecting the $94/share cash offer Ralcorp did not outline the relative value of not selling or refer to any consultation with the board’s financial and legal advisors was unusual, claimed Cernich.

“It is likely not enough to say ‘no’ – and nothing else – when shareholders cannot see an alternative path to a credible higher value.”​

Reassurances were missing​

References to relative value and advisors’ opinions were standard elements of a rejection letter, not only to provide guidance to an unsolicited bidder but also to reassure shareholders that the board had their best interests at heart, ​claimed Cernich.

Specifically, they provide a signal “that third-party specialists have put their reputations on the line to state that the value of the takeover offer is lower than the value of the strategic plan”, ​he added. ​

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“When those reassurances are missing, however – and this is the first time I personally have seen a rejection of a credible, formal offer in which they’re missing - it raises the question of whether the advisors are not willing to put their reputations behind the board’s view.”​

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The omission suggested that Ralcorp’s advisors “may not have endorsed the board’s view of comparative value​”, he argued.

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‘​It is anything but clear that there is nothing further to discuss’​

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It may well be that Ralcorp’s board was right not to engage with ConAgra, and that the Post Foods spin-off was part of a strategy to increase the pool of potential bidders by separating out the company’s distinct parts, he said. But it was “hard to see how.​

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“Until the company lays out that case versus a ConAgra offer so much higher than the unaffected price, however, it’s not a view its shareholders can get to, and thus begins to raise questions about the board’s alignment with shareholders’ interests.”​

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While Ralcorp’s investor relations strategy was famously “taciturn​”, noted Cernich, its reticence on this occasion was "remarkable​".

He added: “For many Ralcorp shareholders staring at a cash offer with no financing contingency at a 44% premium to where shares traded prior to the initial bid, and a clear signal from the bidder that $94 is not best and final, it is anything but clear that there is ‘nothing further to discuss’.”​

Ralcorp: Sum of our parts is greater than the whole​

However, a Ralcorp spokesman told FoodNavigator-USA that the board’s decision to reject ConAgra’s latest offer had been taken “with the assistance of its financial and legal advisors”.​

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The board, he added, had “unanimously determined that the separation of Post Foods from Ralcorp will better allow each company to focus on strategies specific to their particular businesses, thereby unlocking additional significant value for our shareholders”.​

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He would not say why the board had omitted to make reference to its financial and legal advisors in its formal response to ConAgra’s bid on August 12.

ConAgra: 'Extremely disappointed' ​

On August 14, ConAgra chief executive Gary Rodkin claimed that by remaining independent, Ralcorp's private label business would be “more susceptible to the margin pressures from commodity cost volatility”, ​while an independent Post Foods would face the “uncertainty of operating as a highly leveraged company in the competitive cereal category without the benefit of a broader portfolio". ​ ​

What happens next? ​

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ConAgra - best known for its Hebrew National hot dogs and Hunt's canned vegetables - may now seek to launch a hostile bid for Ralcorp, which makes Post branded cereals, private-label foods for retailers, and frozen bakery products for in-store bakeries and foodservice customers.

However, some analysts have predicted it may decide to wait until after the Post spin-off before launching a fresh bid.