S&P estimates that Ralcorp has debt of around $1.9bn.
The rating agency affirmed its BBB- credit rating for the company, but feared that Ralcorp would be unable to improve its funds from operations to total debt to at least 20% by fiscal 2013.
“The outlook is negative as we believe the company may not be able to reduce leverage 3x if it were to use excess cash for large share repurchases, make a large debt financed acquisition, or it is unable to attain at least mid-single-digit revenue growth,” it said.
If Ralcorp fails to meet this target, S&P could downgrade the company’s credit rating.
ConArga deal fallout
S&P has removed Ralcorp from CreditWatch where it had been placed with negative implications after ConAgra’s failed bid for the business in May last year.
ConAgra initially sought to acquire Ralcorp for $4.9bn, plus the assumption of $2.4bn debt.
The company later upped its offer for Ralcorp in August 2011 to around $5.2bn, plus the assumption of $2.4bn. The two companies failed to reach an agreement and the deal was called off in September.
Post split
Last month, Ralcorp also completed the spin-off of its Post Holdings cereal business, which S&P said had created uncertainty about the company’s future financial policies.
Ralcorp still has a 20% stake in Post, which it is expected to sell in the next year.
S&P expects the proceeds to go towards acquisitions.
Improving situation
The ratings agency said that Ralcorp could improve its financial profile and maintain its credit rating if it fostered mid-single digit growth through ‘tuck-in’ acquisitions and minimal volume increases.
“Ralcorp may be challenged to achieve this metrics if raw material costs increase substantially and/or revenues do not grow because the company is unable to pass through pricing or make acquisitions,” it said.
In its first quarter results announced last month, Ralcorp net sales rose 18% compared to the same quarter last year to $1.04bn, mainly as a result of its recent acquisition of Sara Lee’s Refrigerated Dough business.
Operating profit was also up 3% to $165.4m.