You Paid What For Cereal?

Everybody loves cereal in the morning, but not at $94 apparently. Some think it costs just a little bit more. Shares of Ralcorp Holdings Inc. RAH are soaring this morning, after the company announced it had rejected a third offer from Conagara CAG, this time at $94 per share. This is a 10% increase from the all cash offer from back in May. This is from the press release discussing the offer: Dear Mr. Rodkin: I received your letter dated August 11th and have discussed it with our Board of Directors. Ralcorp has a very strong track record of creating superior long term shareholder value. After careful review, our Board of Directors has determined that the separation of Post Foods from Ralcorp will better allow each company to focus on strategies specific to their particular businesses, thereby unlocking additional significant value for our shareholders. We are firmly committed to this plan and therefore, we have unanimously determined that we have nothing further to discuss. Sincerely, /s/ William P. Stiritz Chairman of the Board It is obvious that with enormous amounts of cash on corporate balance sheets, there is a need to put this cash to work. Conagra has been trying to diversify its business away from commercial foods, and buying Ralcorp is a great way to do that. Except Ralcorp does not want to play ball at these prices. Since the beginning of the year, shares of Ralcorp have gained more than 30%, despite all the rockiness in the financial markets recently. At 14 times 2012 earnings, shares of Ralcorp are starting to get a little more fully valued, but Conagra's board has decided it is still not paying enough for future growth. Conagra came out and said that Ralcorp did not give the new offer enough time, and only took a day to reject it. “We are extremely disappointed by Ralcorp's summary rejection of our strong proposal and its repeated refusals to explore this opportunity for its shareholders,” ConAgra Chief Executive Officer Gary Rodkin, 59, said yesterday in a statement. Ralcorp will probably continue to grow even more, as the maker of nuts, sauces and frozen foods under retailers' own brands generates more than $3 billion in revenue per year. Consumer staple stocks, like Ralcorp have seen an interest recently, as there is the need for stability in portfolios, amidst the recent turmoil. People freak out when they pay more than $5 per box for cereal. At $94, it might still look like a good bargain. ACTION ITEMS:

Bullish:
Traders who believe that Ralcorp will go higher might want to consider the following trades:

• Go long Ralcorp if you believe that Conagra is not done. Three offers is a lot, but it does show determination. Conagra could eventually win out.

Bearish:
This could be bearish for Conagra, if the company pays too much for Ralcorp. If Conagra gets deperate for growth, there could be the feeling to overpay, which would be a drag on the company for years.

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