• by Thom Forbes  @tforbes, May 5, 2011

It doesn't take an economist to sense that people are going to resist price hikes in these jittery times. That perception seems to be the main driver behind ConAgra's edgy, if not yet hostile, bid for Ralcorp, which has a hefty business making brands that customers "have never heard of," as the Wall Street Journal's John Jannarone puts it, in grocery-store categories such as cereal, pasta, crackers, jellies/jams, syrups and frozen waffles. Ralcorp, which was spun off from Ralston Purina in 1994 and is based in St. Louis, also produces stalwart Post Cereals such as Alpha-Bits, Grape Nuts, Raisin Bran and Honey Bunches of Oats as well as Slim Jim beef jerky and Swiss Miss cocoa.

Omaha, Neb.-based ConAgra bumped up an earlier bid for Ralcorp to $86 yesterday, which amounts to a roughly $4.9 billion cash offer for all outstanding shares. It would also assume $2.5 billion in debt. That represents a 32% premium over Ralcorp's closing price before an initial $82 per share on March 22. But Bloomberg's Matthew Boyle and Duane Stanford report that Ralston is embracing a "poison pill" defense strategy that typically gives shareholders the right to buy new stock at a discount.

A spokesman for Ralcorp didn't return calls seeking comment but the headline atop Adrienne Carter's piece in the New York Times Deal Book blog reads: "ConAgra May Decide to Go Hostile After Ralcorp Rejects Offer."

In a statement, Ralcorp chairman William Stiritz indeed maintains that remaining independent would be best for shareholders. He says it "has a proven track record of delivering superior results and shareholder value, having delivered total shareholder returns of 418% over the past 10 years and 114% over the past five years," Lisa Brown reports on STLtoday.com.

"Ralcorp has made significant progress with its businesses, and we are excited about the prospect of building on its number one position in private label and enhancing its iconic brands, like Post, in very important categories," says ConAgra CEO Gary Rodkin.

A ConAgra press release claims that it has a strong track record of growing its private label business in a portfolio that is largely made up of branded food, and states that it considers its ability to effectively manage both private label and branded businesses as a strategic advantage.

"In particular, ConAgra Foods' current private label business leverages centralized resources, including marketing and shopper insights, category management, innovation, quality and food safety, and supply chain capabilities, which would benefit the combined entity," it says.

ConAgra's store-brand business, which operates out of Naperville, Ill., has annual sales of about $850 million, Bloomberg reports. It acquired Elan Nutrition LLC last year to bulk up its private-label snack bar business, and it is the biggest supplier of store-brand cereal bars to retailers like Walmart. Ralcorp generated about $3 billion last year from selling foods under retailers' own brands.

Private-label brands accounted for 17.4% of the total U.S. dollar share of food products last year, up from 15.2% in 2006, according the most recent data from Nielsen as reported by Danny King on AOL's Daily Finance in March.

"Given the recent economic slowdown in developed markets, the value-conscious shopper is more visible across store aisles than ever before," Nielsen observes. "No doubt, this trend will continue even as economies stagger out of the recession and rehabilitate." In fact, more than 90% of consumers say they will continue buying private-label brands even if the economy improves.

Many analysts believe a merger would be a good fit. "They are cousins in terms of the types of companies they are," UBS David Palmer, tells the Times' Carter, who points out that the combined company would have about $4 billion in private-label sales, roughly 25% percent of overall revenues. But not everyone is convinced that the strategy is sound.

ConAgra's price will probably need to rise to about $100 a share to get the deal done, according to the Journal's Jannarone, and he says it "could be left with stale goods if name brands come back into vogue." As brand-name products hold tight on price bumps, private labels are less compelling, he points out, and they "tend to have lower margins than their branded counterparts, leaving them more susceptible to a commodity squeeze."

And Bloomberg's Boyle and Stanford quote a client note issued by JPMorgan Chase analyst Terry Bivens: "We have difficulty seeing why ConAgra, which has been emphasizing its branded consumer portfolio, would want such extensive store-brand exposure." He rates ConAgra's shares "neutral."

Tighten up your belt notches; there's nothing like a good food fight.