Marel

USA - We warned about ConAgra last week

30 Jan 2013

One of the biggest acquisitions in the entire market in 2012 was the acquisition of Ralcorp (RAH) by ConAgra (CAG).
 
 
 
The purpose of this acquisition was to give CAG exposure to the higher growth private-label market.
 
 
 
Many investors fail to realize that CAG tried to acquire RAH a year earlier, as described here. Private-label companies will benefit from the lower consumer income due to the ~2% increase in Social Security taxes. Consumers will be looking to cut costs in order to save money.
 
 
 
This will be done by buying more private-labels potentially. The other side of the argument is that consumers will use up what is in their cupboard.
 
 
 
This will potentially lead to short-term declines in sales for all food manufacturers, but will see a big boost once consumer confidence rallies more.

 

Standard & Poor's cut the rating of CAG on December 31, 2012. S&P is quoted as saying:

 

"The downgrade for ConAgra reflects our belief that ConAgra will not be able to restore its credit measures, including adjusted debt to EBITDA (earnings before interest, taxes, depreciation and amortization) to below 3x and funds from operations to total debt to nearly 30%, within two years."

 

This was after the article I had posted about CAG overpaying for RAH. S&P is still a well-respected credit agency.
 
 
 
From an equity rating, it has a $34 price target on it currently. The downgrade by S&P should be a concern for investors as the amount of debt CAG is taking on is becoming a concern, and the potential slowing of RAH's growth. CAG's rating is now BBB-, one step above junk status.

 

In the past few months, CAG has issued a few debt offerings and an equity offering to finance the acquisition.
 
 
 
On September 10, 2012, it issued $248.61M in debt. On December 21, 2012, it entered into an unsecured term loan agreement where Bank of America (BAC) will provide $1.5B, with the potential for $2B.
 
 
 
On December 28, 2012, it issued $300M of 4.95% notes due August 15, 2020, and $450M of 6.625% notes due August 15, 2039. On January 7, 2013 CAG issued $240M worth of stock, diluting current shareholder value. On January 15, 2013, it issued $749.67M of 1.3% due 2016.

 

RAH has had solid growth over the last few years. The problem is that accounts receivable typically has grown faster than revenue.
 
 
 
This leads to a problem with cash flow as it takes longer to collect. It was only until this year that revenue and receivables grew at about the same rate (2009 and 2010 receivables actually grew less)...

 

more, including charts, table




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Source: Argentine Beef Packers S.A.

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