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Post Holdings – A Classic Case of Spin-off (continued)

February 26, 2012 | About:

A reader emailed us on the following, thought we share it over here.

"......they are already coming on the market with 716m in debt and they just issued another 775m, with the proceeds to go to Ralcorp. Am i reading this correctly that this means 716m old debt + 775m new debt =1.5billion in total debt?? With no cash?? This kind of debt dwarfs the 100+m free cash they are generating as it will take them more than a decade to pay off their debt and its not like they are a high-growth company.....

Although the cash flows look ok, their revenues are decreasing from 2009, 2010 and 2011. As much as i love their cereals, something else is catching peoples breakfast attention....."

Our reply as follow:

All the information that you need can actually be found in the Post fillings prior to the spin-off.

In case you dont have the time to look through, below is an extract where they mentioned about the debt issuance:

"As part of the separation, we expect to incur approximately $950 million of new indebtedness, which we expect to consist of $175 million aggregate principal amount of borrowings under a senior secured term loan facility and $775 million in aggregate principal amount of senior notes. We will not receive any proceeds from the senior notes, which we expect to initially issue to Ralcorp in connection with the separation. We expect that approximately $125 million of the proceeds from the term loan facilities will be transferred to Ralcorp in connection with the separation and to directly or indirectly acquire the assets of the Canadian operations of the Post cereals business. Of the remaining $50 million in proceeds, we expect to retain approximately $25 million after payment of fees and expenses relating to the financing transactions."

In summary, the total debt they will incur is as follow:

Debt Interest expense
Senior Notes 775 7.38% 57.16
Term loan 175 8% 14

Hence, not a problem at all, using the above calculation, their yearly interest expense would only be about $71M.

For your concern on their decreasing revenue, bear in mind that all other cereal makers are also affected due to the weak economy.

Furthermore, we believe it is over exaggerated as their market share only drops from 12% to 11% from 2009 to 2011 and this is due to their decreased spending in marketing and higher pricing of their cereals.

Hope this finds you well.


About the author:

We are a 2 partners team managing a concentrated portfolio, with the intention to hold our investments for as long as the fundamentals stay intact. We do not chase, nor wish to participate in the short-term race for returns, choosing instead for the best opportunities to invest in. The time we do so is the time we invest big, taking outsized stakes in what we call the “misguided & misunderstood” investments. Contrary to many, we subscribe to the notion of low risk, high return.

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