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ConAgra Foods (CAG - Analyst Report) announced that it has entered into an agreement to acquire U.S. based private label food manufacturer, Ralcorp Holdings, Inc. , for $90.00 per share in cash. Subject to the approval of Ralcorp’s shareholder and some regulatory formalities, the acquisition is expected to be completed by March 31, 2013.

The offered price per share, payable to the shareholders implies a 28.2% premium on Ralcorp’s closing share price on November 26. Exiting the fiscal year 2012 (ended September 30), Ralcorp had approximately 56 million outstanding shares.. The value of the transaction is approximated at $6.8 billion, after considering debt. After the acquisition of Ralcorp, ConAgra will emerge as the largest private label packaged food company in North America.

Ralcorp posted annual sales of $4.32 billion in fiscal 2012, compared to ConAgra’s $13.26 billion during its fiscal year 2012 (ended May 2012). Management expects the combined entity to garner sales of over $18 billion in the future. The company will have employee strength of over 36,000.

With a wide range of offerings from Ralcorp like cereal, pasta, crackers, jellies and jams, syrups, frozen waffles, combined with meals, entrées, condiments, sides, snacks, and desserts of ConAgra, management expects the total private label business to worth around $4.5 billion. The synergistic benefits are likely to be great as ConAgra lacks a significant presence in the markets where Ralcorp primarily operates.

The acquisition is expected to provide sales and EPS growth going forward, having modest impact in 2013, and will also help drive shareholders’ value. Starting from the fourth year, ConAgra is expected to derive cost synergies of about $225 million per year from the acquisition.

The company plans to finance the transaction through existing cash and credit facilities along with new borrowings.

We currently have a Neutral recommendation on CAG. The stock bears a Zacks #2 (Buy) Rank, while its prime competitors HJ HEINZ CO. and BRF Basil Food (BRFS - Snapshot Report) carry a Zacks #3 (Hold) Rank.

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