General Mills Adding Chex to Its Bowl for $570 Million

Trying to escape a cereal price crunch, Ralcorp Holdings Inc. said Wednesday that it will sell its Chex line to Cheerios and Wheaties maker General Mills Inc. for $570 million.

The deal edges General Mills closer to industry leader Kellogg Co., as the top competitors in the $8-billion cereal market continue the price war that signaled Ralcorp’s exit.

In addition to Chex, General Mills would get such brands as Cookie Crisp and Almond Delight ready-to-eat cereal brands and Chex Mix snacks. The Minneapolis-based company would also get a Cincinnati plant that employs 240 people.

The deal in effect would end Ralcorp’s losing battle to compete with better-known cereals. St. Louis-based Ralcorp is the nation’s fourth-largest cereal maker but fifth in brand-name cereals. It would continue making private-label cereals, typically sold under store names, where it is the industry leader, with about 60% of the market.

“The price cuts that came about really hurt them,” said Tony Vento, an analyst with Edward Jones. “Ralcorp is just too small a player to really compete with the big boys.”

Ralcorp stock rose more than 12%, or $2.50 per share, to $22.50 on the New York Stock Exchange. General Mills fell 25 cents to $55.125.

The breakfast cereal business has been engulfed in a price war since spring. That took a toll on Ralcorp, which soon began talking with potential buyers.

Last month, it announced it was selling its Keystone, Breckenridge and Arapahoe Basin ski resorts in Colorado to Vail Associates for about $310 million. It retained a 25% interest.

The two deals leave it making store-brand cereals, which Vento called “a business that’s growing and one they’ve done pretty well at in the past.”

That business and Ralcorp’s other businesses--crackers and cookies and its Beech-Nut baby food line--would be spun off as a new company with the same name. Ralcorp said it will be left with little or no debt and about $500 million in annual revenue.

Ralcorp spokesman Patrick Farrell said as many as half the 350 employees in St. Louis could be laid off because of the sale.

Given the recent cereal market, “we really didn’t have any choice but to pursue the sales,” Farrell said.

For General Mills, it means a boost of 3 percentage points in the branded cereal market, to about 27%--still about 6 points behind Kellogg.

“It shores up their share as the No. 2 player,” said George Kress, an analyst with Argus Research. “It gives them a little breathing room in front of Philip Morris, which was catching up a bit with the Nabisco brands.”

The Ralcorp branded cereal and snack mix products accounted for more than $400 million in sales in the year ended June 30. General Mills had domestic cereal sales of $2.2 billion and $660 million in snack food sales in the year ended May 26.

The deal has been approved by both companies’ boards and is expected to close after approval by Ralcorp shareholders and federal regulators over the next few months.

General Mills would pay from $330 million to $360 million in its stock and assume $210 million to $240 million in debt on the deal. The combination of stock and debt would be adjusted to total $570 million.