ConAgra Foods Inc (CAG.N) will have to dig deeper in its bid for Ralcorp Holdings Inc's (RAH.N) low-cost foods, after Ralcorp rejected a sweetened cash offer of $4.9 billion.

Shares of Ralcorp -- which owns the Post cereal brand but mainly makes foods that stores brand as their own -- rose as much as $4 above the new offer price of $86, indicating investors were expecting a higher bid.

However, the stock pared most of that premium to trade about $1 above the offer price, following Ralcorp's rejection.

Ralcorp, which said ConAgra's proposal was not in the best interests of shareholders, also adopted a shareholder rights plan to thwart hostile takeovers.

"ConAgra was very wise to recognize the significant value in Ralcorp and there would be plenty left on the table at $100 (per Ralcorp share)," said Janney Capital Markets analyst Jonathan Feeney.

Some analysts have said Ralcorp may attract interest from private equity firms which could expand the company's cash-flow generation.

One source familiar with the situation, who was not authorized to speak to the media, said Apollo Global Management and others may be sniffing around.

ConAgra's bid is the latest in a series of deals across many industries as CEOs, buoyed by strong balance sheets, excess cash and cheap financing, feel more confident about M&A in a recovering economy.

PRIVATE-LABEL BET

ConAgra's products, including Healthy Choice frozen meals and Slim Jim meat snacks, compete with cheaper store-brand foods which have been gaining popularity as shoppers, faced with rising prices of everyday items such as gas, look to pinch pennies.

The in-house brands produced by third parties such as Ralcorp are more affordable as they involve less marketing spend compared with national brands.

Combining ConAgra's $850 million private-label business with Ralcorp would result in about $4 billion in annual store brand revenue, and account for a quarter of ConAgra's overall sales, versus around 7 percent now.

ConAgra estimates the deal will save about $250 million in costs annually by the third year, mostly from supply chain efficiencies, at a time when food companies are struggling with higher sourcing and transportation costs.

"It's a bet on private label, but it's a bet on branded as well. There's no ifs, ands or buts. We intend to grow both parts," Chief Executive Gary Rodkin said on a conference call with analysts.

S&P Equity analyst Tom Graves said the deal would help ConAgra appeal to a wider spectrum of shoppers.

"I think it's possible to be successful at both but I think it's challenging," Graves said.

However, JP Morgan analyst Terry Bivens was skeptical.

"We cannot see a scale argument here, and also have difficulty seeing why ConAgra, which has been emphasizing its branded consumer portfolio, would want such extensive store brand exposure," Bivens said in a note.

ALL-CASH

ConAgra's latest offer of $86 a share in cash, was sweetened from an earlier bid of $82 a share in cash and stock, made on March 22. ConAgra would also assume $2.5 billion in debt.

Janney Capital's Feeney said the move to an all-cash bid was a "key change," as both stocks were inexpensive.

Ralcorp said late on Sunday it had rejected an unsolicited offer received from a third party in March.

The latest bid represents a premium of 3 percent to Ralcorp's Tuesday close and a fifth more than its trading price before April 29, when CNBC first reported that ConAgra had bid for Ralcorp.

In a letter to Ralcorp Chairman William Stiritz, ConAgra CEO Rodkin said he would like a response to the offer before May 12.

Ralcorp, which sells pasta, cereals, snacks, syrups and other food products, has grown through acquisitions, buying as many as 20 companies in the past 10 years, including American Italian Pasta for $1.2 billion last year.

Centerview and Bank of America were advisers to ConAgra.

ConAgra shares rose 3 percent to $25.81, their highest in over a year, before paring some gains to $25.28.