• by Thom Forbes  @tforbes, November 28, 2012

After more than a year in the kitchen, Omaha, Neb.-based ConAgra has finally cooked up a generic deal palatable to Ralcorp –- about $6.8 billion in cold cash. The acquisition, which comes after Carl Icahn protégé and Corvex management founder Keith Meisterjoined the Ralcorp board last month and reportedly agitated for a deal, creates the largest private label manufacturer in North America. 

In the meantime, St. Louis-based Ralcorp spun off its Post cereals business to shareholders last February –- a deal that seen Post Holdings shares gain 28% gain thus far. Coincidentally, ConAgra will pay $90 a share in cash for Ralcorp -- a 28% premium above its closing price yesterday. The deal is expected to close by March 31.

"This transaction gives us an even stronger platform across sales channels and price points, increasing our importance with customers and suppliers," ConAgra CEO Gary Rodkin told investors during a call Tuesday, reports the Chicago Tribune’s Emily Bryson York. “Together, we'll be the largest private-label food manufacturer in North America, a clear leader in this business segment that's growing faster than branded food.”

But Harry Balzer, chief food industry analyst for market-research firm NPD Group, tells the Wall Street Journal’s Paul Ziobro and Julie Jargon that consumption of private-label food has fallen to –- you guessed it –- 28% after peaking at 29% in February. "The national brands are not going to roll over," Balzer says. "They are responding with their move to everyday low pricing."

“The trend has stalled, in part because the price gaps between the national brands and the store brands have narrowed,” the Journal reporters write. “Noting that private-label foods have lost share in the U.S. for two years in a row, research firm SymphonyIRI Group Inc. earlier this month argued that the products have hit a ‘proverbial glass ceiling.’”

Still, “private-label brands really have become true brands,” Susan H. Viamari, editor of SymphonyIRI’s Times and Trends, tells The New York Times’ Michael J. de la Merced and Stephanie Strom. “There was a time when they were knockoffs you would bury in the bottom of your cart, but now in many cases they are just as good or even better than national brands and represent a smart purchase.”

The deal “will also give [ConAgra] inroads with restaurant groups such as McDonald’s, which is a big purchaser of Ralcorp’s breakfast products,” Alan Rappeport and David Gelles point out in the Financial Times. “They will benefit as consumers continue to hang onto their purse strings as well as have better relationships with retailers who are trying to promote value offerings,” Morningstar analyst Erin Lash tells them.

Jim Hertel, managing partner at grocery consulting firm Willard Bishop and a self-confessed “long-term bull on private label,” tells the Chicago Tribune’s Bryson York that a major reason for private label’s growth is the importance of the business for retailers, “who control what goes where in their stores.”

“He added,” Bryson York writes, “that most major retailers have three private labels, one at a ‘rock bottom’ price, discounted 35% to 40% from national brand equivalents; a second tier designed to compete with national brands at a 20% to 25% discount; and a third brand, priced roughly the same as name brands but with added benefits, such as certified organic.” 

The Times’ de la Merced and Strom observe that “there is an argument … that companies that offer both branded and private-label products risk cannibalizing their brands or muddying their relationships with their customers. That may not be a danger for ConAgra because its brands do not emphasize its corporate parent, thus giving them sufficient distance to stand on their own.”

“It’s a challenge to manage a product portfolio that is broader but more complex, but there are also opportunities because you can forge more and different relationships with retailers,” says David Garfield, who leads the consumer products practice at AlixPartners, a consulting firm.

Reuters’ Martinne Geller and Siddharth Cavale report that “Ralcorp is a top maker of private-label cereal, pasta, crackers, jams and jellies, syrups and frozen waffles -- categories where ConAgra does not have a large presence.”

“For the most part, we do not compete with ourselves,” according to ConAgra CEO Rodkin. He also says that ConAgra “plans to drive the private-label business by bringing to it some skills of a branded company, such as product innovation,” according to the Reuters report. 

There is some speculation this morning that ConAgra will next go after Oakbrook, Ill.-based TreeHouse Foods, which manufactures private-label soups, hot cereals, salad dressings and other grocery products. But in the meantime, Ralcorp deal is “a positive catalyst” for TreeHouse, according to Suntrust Robinson Humphrey analyst Bill Chappel in the Reuters story, because it “temporarily ties up the two other major private-label buyers in the acquisition landscape.”