Kraft Foods Inc. (NYSE: KFT) announced a definitive agreement to merge its Post cereals business into Ralcorp Holdings (NYSE: RAH). The transaction is tax-efficient and worth approximately $2.6 billion to Kraft and its shareholders. For purposes of comparison, to have achieved an equivalent amount in a taxable transaction, Kraft would have needed to receive approximately $4.0 billion in cash for the business.

The Post cereals business had net revenues of about $1.1 billion in 2006, and includes such popular cereals as Honey Bunches of Oats, Pebbles, Shredded Wheat, Selects, Grape Nuts and Honeycomb. The brands in this transaction are distributed primarily in North America.

Douglas A. McIntyre is an editor at 247wallst.com.

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.

Raider Nelson Peltz wants changes at Kraft (NYSE: KFT) and he may be getting them. The Wall Street Journal speculates (subscription required) that the Post cereals unit of the big food company might bring in as much as $3 billion. Pepsi (NYSE: PEP) is viewed as on of the potential buyers.

Kraft is a dog of a stock. Over the last year, its is off 5% while the S&P is up about 10%. Q2 increases in revenue and net income were both modest with total sales hitting $9.2 billion and net income $770 million.

A look at the 10-Q shows that sales by division are uneven. Most of the company's US businesses are barely growing at all. Sales at the firm's cereals division were flat at $1.61 billion. Operating income was down slightly to $226 million.

But, cereals is not the only troubled division at Kraft. Operating income dropped in four of the company's seven divisions in the last reported quarter.

Peltz is right. Time to start selling stuff off.

Douglas A. McIntyre is a partner at 24/7 Wall St.

The world's second-largest food company, Kraft Foods (NYSE: KFT), bellied up to the earnings buffet this morning to announce second-quarter results. The parent of such household brand names as Oscar Mayer, Nasbisco, and Post said that its profit rose nearly 4% to $707 million, or 44 cents per share. Excluding items, Kraft banked 50 cents per share, 3 pennies above analysts' expectations.

Quarterly sales rose 6.8% to $9.21 billion, trumping Wall Street's sales target of $8.97 billion. North American sales were 2% higher during the reporting period, with sales in the beverage unit improving by 4.3%.

According to MarketWatch, sales of new products, including new Crystal Light flavors and Nabisco 100-calorie snack packs, helped offset challenges from rising dairy costs and increased marketing expenses.

Dow Jones reports that Kraft officials now expect organic net revenue growth of at least 4% in 2007, a slight improvement from earlier estimates of 3% to 4%. Full-year earnings before items remain estimated in a range between $1.75 and $1.80 per share.

In early-morning trading, Kraft shares have gained about 1%. The stock is attempting to muscle back above its 80-week moving average, which KFT breached yesterday for the first time since April.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.

MOST NOTEWORTHY: Intel Corp (INTC), Advanced Micro Devices, Inc (AMD), Post Properties, Inc (PPS), Analogic Corp (ALOG) and the base metals sector were today's more noteworthy upgrades:

• DA Davidson raised Intel Corp's (NASDAQ: INTC) rating to Buy from Neutral based on market share gains and unexpected PC growth.

• American Technology upgraded Advanced Micro Devices Inc (NYSE: AMD) to Buy from Neutral as the firm expects shares to trade higher near-term with data not likely to get worse over the next six months. The firm suspects AMD could win a notebook platform at Toshiba Corp (TOSBF) and expects further offerings at Dell Inc (DELL).

• Banc of America upgraded shares of Post Properties Inc (NYSE: PPS) to Neutral from Sell and raised their target to $53 from $42 after REIT Wrap, a real estate industry newsletter, reported the company may have already received several unsolicited bids.

• Stanford upgraded Analogic Corp (NASDAQ: ALOG) to Buy from Hold based on improving fundamentals in the security and medical businesses.

• Goldman upgraded the base metals sector to Attractive from Neutral as the firm believes above-consensus metal prices for 2008-2009 are sustainable. The firm favors copper fundamentals over nickel, zinc and aluminum and views Freeport-McMoRan Copper & Gold Inc (FCX) as its top pick.

OTHER UPGRADES:

• Lehman upgraded Alon USA Energy, Inc (NYSE: ALJ) to Equal Weight from Underweight.

• Bear Stearns upgraded Shanda Interactive Entertainment Ltd (NASDAQ: SNDA) to Outperform from Peer Perform.

• Wesco International, Inc (NYSE: WCC) was upgraded to Strong Buy from Outperform at Raymond James.

• BMO Capital raised ResMed Inc (NYSE: RMD) to Outperform from Peer Perform.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).