Kraft to sell two dozen Post cereals in $1.7-billion deal

Kraft Foods Inc. agreed to sell its two dozen Post cereals to Ralcorp Holdings Inc. on Thursday in a nearly $1.7-billion stock deal that would make the private-label food maker a major player in the cereal market.

The acquisition, which is expected to be completed in mid-2008, would catapult the maker of store-brand cereal into the No. 3 position, behind industry leaders Kellogg Co. and General Mills Inc.

“This acquisition is indeed a watershed event for Ralcorp,” said Kevin Hunt, the St. Louis-based company’s co-chief executive.

But industry observers said Ralcorp would face an uphill battle to foster, market and develop brand-name cereals such as Shredded Wheat Spoon Size, Raisin Bran, Honeycomb and Pebbles.

“I don’t recall a branded company being able to run private label or a private label being effectively able to run brands,” Deutsche Bank analyst Eric Katzman said.

If Ralcorp succeeds, the payoff will be substantial.

The tax-free transaction would boost Ralcorp’s sales by 50% to $3.3 billion a year from $2.2 billion, with Post cereals accounting for about 32% of total annual sales.

“For them, the biggest challenge long term will be running branded versus private label and running them concurrently,” Morningstar analyst Greggory Warren said. “The focus will now be delivering on the branded goods against very strong competitors. It’s not going to be an easy road for them.”

At Kraft, the Post portfolio generated sales of $1.1 billion last year.

Under terms of the agreement, Kraft would first split off or spin off Post and its related assets to shareholders. The Post cereals business then would be combined with Ralcorp. Kraft shareholders would own about 54% of the new Ralcorp when the deal is complete, with Ralcorp shareholders owning about 46%.

Ralcorp would also assume $950 million in debt, boosting the total deal value to $2.6 billion.

Ralcorp officials said they opted not to fold Post into their generic cereal brands and were instead crafting a new division within the company to run Post.

Meanwhile, the Post addition would give Ralcorp momentum to pursue more acquisitions in the future.

“The Post platform gives us the scale to now look at the potential of branded acquisitions,” said co-CEO David Skarie, who would be responsible for Post after the transaction is completed.

The sale, which must receive shareholder and regulatory approval, is the biggest since Kraft CEO Irene Rosenfeld announced an effort to shed slow-growing units to help the world’s second-largest food and drink maker better focus its massive stable of products.

“The business is in good shape today, but it can do even better with a company like Ralcorp,” said Chris Baldwin, vice president of Kraft’s snacks and cereals group.

The expanded Ralcorp would include the Post cereal manufacturing plants in Battle Creek, Mich.; Jonesboro, Ark.; Modesto; and Niagara Falls in Canada. Ralcorp would retain employees at those facilities.

Kraft shares fell 61 cents, or 1.85%, to $32.37 on Thursday. Ralcorp shares hit a three-month high, climbing $5.77, or 10.4%, to $61.24.