The Wall Street Journal is reporting (subscription required) that Kraft Foods (NYSE: KFT) is close to a deal to sell the Post cereals brand for about $2.8 billion to Ralcorp (NYSE: RAH), a leading maker of private label foods.The deal is interesting because it would be a huge acquisition for Ralcorp -- which currently has a market cap of $1.4 billion, about half the price it will pay for Post. That could make financing tricky but, according to The Journal:
Kraft and Ralcorp are discussing a stock-based transaction that would free both parties from tax liability. That would be done by first spinning off the Post business and then merging it with Ralcorp, leaving Kraft holders with equity in the merged entity. This approach might involve Kraft, of Northfield, Ill., first putting debt on Post's balance sheet and returning the proceeds to shareholders through a stock buyback or dividend.
The deal would increase Ralcorp's sales by about half, but I'm not sure if it's such a good idea. Big, expensive acquisitions like this (fish gobbling up sharks) have a tendency to not end well. And given Ralcorp's strategy of being a low-cost producer of store-brand products, where exactly does this deal fit in?
It will be interesting to see how Ralcorp investors react to the rumor or announcement of the deal. I have to think it won't be seen as good news.
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