Swiss food giant Nestle made its takeover offer Tuesday for Ralston Purina Co. official, producing a windfall for Ralston shareholders and driving many other food stocks higher on merger hopes.
Nestle's $10-billion deal would create one of the world's largest pet food companies and expand Nestle's presence in a segment that is growing twice as fast as the overall food sector.
Nestle, confirming reports that first surfaced over the weekend, said it will pay $33.50 a share in cash for each of Ralston's outstanding shares. The offer is a 36% premium to Ralston's price Friday and sent the pet food company's shares (ticker symbol: RAL) up $6.88, or 28%, to $31.50 on Tuesday on the New York Stock Exchange.
The deal helps increase Nestle's business in a high-growth market that is fueled in part by consumers' willingness to spend significant amounts of money on their pets.
"People care for their pets as well as a human child would get taken care of," said Merrill Lynch analyst Leonard Teitelbaum.
Nestle Chief Executive Peter Brabeck-Letmathe said Ralston's dry-dog-food business and strong U.S. presence would help shore up weaker areas in his company's portfolio.
"We saw in Ralston-Purina a perfect fit . . . to create a full-fledged, complete pet-care company," Brabeck-Letmathe said.
The Swiss company has seen pet food become one of its fastest-growing areas since it entered the more-than-$33-billion-a-year market in 1985. Its brands include Friskies cat food and Mighty Dog.
The merged Nestle Purina Pet Care's annual pet-food sales would reach $6.3 billion, rivaling privately held Mars Inc., which had sales last year of about $6 billion. Among Nestle's businesses, only chocolate is a larger market, at some $40 billion.
"It's a really good thing for Nestle," said analyst Amanda Hopkins at fund manager Union Bancaire Privee in Geneva. "Ralston is second worldwide in pet-food sales, behind Mars. Pet-food sales are growing by about 6.5% annually, about double that for human food."
Indeed, slow growth expectations pummeled many food stocks in 1998 and 1999. But investors rushed back into many of the stocks in 2000, in part attracted by their relative value compared with highflying technology stocks and in part betting on further consolidation.
The Standard & Poor's index of 11 major food stocks rose 23% last year, while the tech-dominated Nasdaq composite index fell 39%.
Many food shares rose again Tuesday on news of the bid for Ralston. Winners included Del Monte Foods (DLM), up $2.75 to $11.50; Hershey Foods (HSY), up $1.69 to $58.88; H.J. Heinz (HNZ), up $1.31 to $43.56; and General Mills (GIS), up $1 to $42.
The Ralston deal could raise antitrust concerns in the United States, where the combined company would control more than half of the dried-cat-food market, analysts said. But Nestle officials said they did not see any insurmountable antitrust issues, and some antitrust experts agreed.
"It sounds to me like it would be relatively easy thing to cure by divesting a brand to save the entire deal," said Stephen Houck, an antitrust specialist at New York law firm Reboul MacMurray. "It's not something that should prevent the transaction from going forward if there are no other significant competition problems."
In Switzerland, Nestle shares rose 0.7% on Tuesday.
At 18.6 times Ralston's earnings before interest and taxes, analysts described Nestle's takeover bid as high, but also said Nestle would be able to absorb it.
Nestle would not issue fresh equity to fund the deal, but would sell Ralston's stakes in DuPont Co., Conoco Inc. and Interstate Bakeries Corp., aggregating $900 million, Chief Financial Officer Mario Corti said in a conference call.
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Food Stocks: Back on the Menu
The takeover deal by Switzerland's Nestle of Ralston Purina on Tuesday helped drive many other food stocks higher, resuming a rally that began in spring as investors began to turn away from technology stocks.
Standard & Poor's index of 11 major packaged-food stocks, monthly closes and latest
Source: Bloomberg News