Private-label cereal maker Ralcorp Holdings Inc. said Thursday it will purchase Kraft Foods Inc.'s Post cereals unit, the nation's third largest with brands like Spoon Size Shredded Wheat and Post Raisin Bran.
The companies said the deal includes Ralcorp stock valued at about $1.65 billion. Ralcorp will also assume $950 million in debt, boosting the total deal value to $2.6 billion.
"This acquisition is indeed a watershed event for Ralcorp," said Kevin Hunt, the St. Louis-based company's co-chief executive officer.
Ralcorp shares climbed 10 percent in premarket trading as it gains heft to compete against brand-name cereal industry leaders Kellogg Co. and General Mills Inc.
Under terms of the agreement, Kraft will first split off or spin off Post and its related assets to Kraft shareholders. The Post cereals business would then be combined with Ralcorp. Kraft shareholders would own about 54 percent of the new Ralcorp when the deal is complete, with Ralcorp shareholders owning about 46 percent.
The Post cereal business generated sales of $1.1 billion last year. Its two dozen cereal brands also include Honey Bunches of Oats, Pebbles, Post Selects and Grape Nuts.
"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.
Ralcorp shares climbed $5.53, or 10 percent, to $61.00 in premarket trading Thursday. Kraft shares rose 12 cents to $33.10.
The deal allows Ralcorp, which makes store-branded cereal and frozen bakery items, to compete head-to-head in the brand-name market against Kellogg.
Executives said adding Post to the company may give Ralcorp the 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 David Skarie, co-chief executive officer who will be responsible for Post after the transaction is completed.
The deal also allows Northfield-based Kraft to better focus on its own growth strategy.
Kraft CEO Irene Rosenfeld has launched a massive turnaround effort aimed at revitalizing sales of the company's brands and is shedding slow-growing divisions to better focus the portfolio of the world's second-largest food company.
Post's existing marketing and sales support team will continue to be based in New Jersey, and its existing R&D team will continue to be located in Battle Creek, Mich.
The transaction will boost Ralcorp's 2007 sales by 50 percent to $3.3 billion a year from $2.2 billion, with Post cereals accounting for about 32 percent of total annual sales.
Kraft said if the deal is conducted through a spin off, it expects shares to be diluted by 13 cents on an annual basis. A split-off would dilute earnings by seven cents.
The deal is expected to close in mid-2008, subject to regulatory and Ralcorp shareholder approvals. Kraft will provide transition services for up to 18 months after closing.
The expanded Ralcorp will include the Post cereal manufacturing plants in Battle Creek, Mich.; Jonesboro, Ark.; Modesto, Calif.; and Niagara Falls in Canada. Ralcorp will retain employees at these facilities.