Consumer Firms Back in Spotlight : Takeover Interest Grows After Reynolds-Nabisco Deal
Candy bars, soap, fried chicken and cookies may lack glamour, but, as necessities in American life, they are sure-fire moneymakers.
Fueled by the announcement over the weekend that R. J. Reynolds Industries will buy Nabisco Brands, this cash-generating ability of mundane household goods is fanning speculation on Wall Street that the recent spate of mergers among major makers of consumer products will be followed by several more key combinations in coming months.
As Reynolds prepared for today’s offer of $4.9 billion, or $85 a share, in cash, preferred stock and debt securities for Nabisco, or about three times the company’s book value, several analysts said companies such as General Mills, Quaker Oats, Pillsbury and Campbell Soup are likely candidates for the next round of acquisitions.
Although the mergers will concentrate in fewer hands the goods that many consumers have come to believe they cannot live without, analysts say the average shopper will not notice much difference in the products they’re used to buying.
Prospective corporate buyers most often mentioned by analysts Monday were Pepsico, Unilever and tobacco king Philip Morris. Noticeably absent from the roster was Procter & Gamble, the consumer products giant that pioneered the concept of “shelf space” and that, according to Merrill Lynch analyst Alan Kaplan, “likes to build things up itself, not through acquisition.”
For most consumer product companies, however, acquisitions hold a strong attraction, analysts said. Makers of fast food, tobacco, colas and the like are flush with cash, prodding them to seek ways to spend their money that will enable them to grow while keeping them near the business they know best: consumer product marketing.
Distribution Channels
Such deals involve the purchase of established name brands and, even more important, ready-made distribution channels in this country and abroad, analysts said.
For example, when Beatrice spent $2.8 billion for Esmark last year, the conglomerate was after a national presence through Esmark’s Hunt-Wesson marketing arm, said Roger Spencer, an analyst at Paine Webber in New York. Until then, he said, Beatrice was selling a series of products through other distributors nationally or through regional channels of its own. “These days, distribution costs are just as important--maybe even more important--than production costs,” Spencer said, adding that production costs traditionally have been low for consumer goods makers.
A similar rationale was behind Nestle’s $3-billion acquisition of Los Angeles-based Carnation as Nestle sought to buy its own outlet to distribute such products as Swiss Miss nationally.
Under the merger agreement announced Sunday, Nabisco, the nation’s fourth-largest food company, and Reynolds, the second-largest tobacco company, will overnight become the largest consumer goods maker in the United States and, with $19 billion in combined annual revenues, will be second only to Europe-based Unilever in the world market.
The combination rivals last month’s $5-billion acquisition of Signal Cos. by Allied Corp. as the largest merger ever involving non-oil companies. The merged companies will keep the R. J. Reynolds Industries name and the Nabisco name in product lines. Reynolds’ leading brands include Winston and Camel cigarettes, Kentucky Fried Chicken, Canada Dry soft drinks and Del Monte canned goods. Nabisco’s include Ritz crackers, Oreo cookies, Life Savers candy and Baby Ruth candy bars.
Reynolds says it expects the merger to push down its bond rating “from a strong AA to an A temporarily.” But the company said that’s a small setback, seeing that the merger will increase Reynolds’ access to U.S grocery shelves as well as boost Reynolds’ foreign sales to 27% from 21% of revenue, the company said.
Analysts agree that companies such as Unilever, which seeks a greater presence in the U.S. food market, or Philip Morris, which wants to diversify out of tobacco but remain in consumer products, also are likely to decide that the benefits of merging will outweigh any drawbacks.
Not everyone endorses the merger idea, however. Barry M. Ziegler, an analyst at Tucker, Anthony & R. L. Day, for example, is among those who wonder whether Reynolds would have been better off to forgo Nabisco and instead continue to buy back its own stock.
He says that stocks in consumer products were unpopular and underpriced during the period of rising prices of the late 1970s and early 1980s, selling at price-to-earnings ratios that were 28% below those of the Standard & Poor’s 500-stock index. Such ratios show how many times the price per share exceeds the earnings per share and indicate the market’s view of the company’s earning potential.
Now, he says, with price increases stabilizing, stocks in these slowly growing but cash-generating companies have become popular investments again, selling by some estimates at 10% above price-to-earnings ratio of the S&P; index.
In trading Monday, Reynolds stock rose 62.5 cents a share to $75, while Nabisco fell 25 cents to $81.625.
The recent flurry of merger rumors sparked by Reynolds and Nabisco has pushed up even more the price of consumer product companies’ stocks. Ziegler warns that “these companies may no longer be a bargain.” R.J. REYNOLDS AND NABISCO AT A GLANCE 1984 sales by business segment in billions of dollars R.J. REYNOLDS Tobacco $7.685 Foods and Beverages $4.698 Other $0.738 NABISCO BRANDS Biscuit Products $2.527 Grocery Products $2.124 Confectionery and Snack Products $1.602 R.J. REYNOLDS
Sales $12.97 billion Net income $1.21 billion Per share $10.27
NABISCO BRANDS
Sales $6.25 billion Net income $308 million Per share $5.028
