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ConAgra (CAG) is in the process of raising $3.975 billion in debt to complete its acquisition of Ralcorp (RAH).  The weighted average interest rate of the debt issuance is 2.879% - well below the 4% number mentioned by CAG management on the conference call discussing the transaction.

Quick Thoughts on CAG Debt Issuance - CAG Prospectus

However, recall that the total transaction size is $6.560 billion and that a portion of that (approximately $1.9 billion) represents the assumption of outstanding RAH debt.  RAH debt isn’t cheap – 6.3% weighted average interest rate.  CAG has already moved to “correct” that interest rate structure, commencing a tender for approximately $670 million of RAH debt, with a cost above 7.25%.

The net of this is blended interest rate right around 4% (newly issued debt plus assumed debt).  We are therefore reluctant to increase our synergy estimate at this point as some analysts have done – we remain at $0.15 - $0.20.  We recognize that there is upside to that number as CAG continues to correct the debt structure at RAH to more appropriately reflect current market rates.

Still, we remain very constructive on CAG shares as we see a favorable risk/reward with upside toward $37 - $38 a share.  We see CAG as a relatively inexpensive name (13.8x calendar 2013 EPS versus the packaged food group trading at 17.6x) that has additional upside to earnings on a standalone basis as well as a transformative acquisition that is scheduled to close during calendar Q1 2013 that should provide investors a path to a higher EPS profile through accretion and synergies.

Enjoy the long weekend,

 - Rob

Robert  Campagnino

Managing Director