General Foods Backs $5.6-Billion Takeover Bid by Philip Morris
General Foods said Friday that it has agreed to a takeover by Philip Morris in a $5.6-billion transaction that will be the largest non-oil merger in history and will create the nation’s largest consumer goods company.
Under terms of the agreement to be submitted Monday to the boards of both companies, Philip Morris will offer $120 a share in cash for the more than 46.9 million shares outstanding of General Foods. The latter company would be operated as a separate unit within Philip Morris, with five General Foods directors getting seats on the Philip Morris board and James L. Ferguson, General Foods’ chairman and chief executive, becoming a vice chairman of Philip Morris.
Ferguson and Hamish Maxwell, Philip Morris chairman and chief executive, said in a joint statement that they will recommend approval of the merger to their boards.
Both companies are among the leading merchandisers in their fields. Among General Foods’ familiar brand names are Maxwell House and Sanka coffees, Jell-O gelatin, Kool-Aid drink mix and Oscar Mayer packaged meats. Philip Morris is the nation’s largest cigarette maker, dominating the domestic market with 35.5% of all sales as of the end of June. The company’s Marlboro brand alone accounts for 21.5% of all U.S. cigarette sales.
The two companies’ combined sales of $22.8 billion in their latest fiscal years would place them 13th on the Fortune magazine list of the country’s 500 biggest industrial companies. Most of that represents Philip Morris, with $13.8 billion in revenue for the year ended Dec. 31, compared to General Foods’ $9 billion for its fiscal year ended March 31.
Coming on the heels of June’s $4.9-billion merger of Nabisco Brands and R. J. Reynolds Corp. and the earlier $2.9-billion acquisition of Los Angeles-based Carnation Co. by Nestle, Friday’s announcement may set off yet another round of speculation over further takeover prospects in the packaged food industry. Among the companies considered inviting targets for suitors are Pillsbury, Quaker Oats and Sara Lee.
“People recognize that the earnings of food companies and their prospects for the next six to 12 months are much better than industrial companies,” said Clinton O. Mayer III, a food industry analyst for Bear, Stearns & Co. “Their raw material costs are low and cash flow is high.”
One obstacle to further acquisitions does bulk large, however: the dwindling number of potential buyers with the billions of dollars in resources needed to execute such deals.
Owned by Others
Coupled with the Reynolds-Nabisco merger, Friday’s transaction all but completes the diversification of the U.S. tobacco industry, an exceptionally profitable business that is nevertheless vulnerable to its dependence on a product with declining sales prospects and growing legal hazards.
Of the four other major cigarette makers, Brown & Williamson is owned by the British conglomerate BATUS; Lorillard is owned by Loews Corp., a private diversified company; American Brands owns distillery, office products and baked goods units, and Liggett & Myers is owned by GrandMet, another British conglomerate.
Although Philip Morris had moved to diversify in recent years with acquisitions of Miller Brewing Co. and Seven-Up Co., neither unit has contributed much to the parent’s profits. The company also owns Mission Viejo Co., developer of the Orange County community of the same name.
“Of Philip Morris’ operating (pretax) income in 1984, 93% was tobacco,” said John A. Baugh, an industry analyst for Wheat, First Securities in Richmond, Va. “Miller and Seven-Up were so weak the general consensus was they had to do more diversification.”
Friday’s agreement culminates a process that began Tuesday, when General Foods announced that it had received an unsolicited telephone offer to negotiate a sale of the company. Although it refused to identify the bidder, conjecture focused on Philip Morris, which had been a rumored suitor for months.
During the next three days, General Foods stock gained $25.375 a share, closing Thursday at $110.25 on the New York Stock Exchange.
Both companies requested a suspension of trading early Friday pending their announcement, but by then the Big Board had decided to remain shut because Hurricane Gloria was expected to hit New York later in the day. At Jefferies & Co., a Los Angeles firm that makes a market in listed stocks, traders quoted General Foods at $117.75 to $118. Philip Morris was quoted at $73 to $73.50, a loss of as much as $2.875 from Thursday’s close on the Big Board.
Executives of both companies asserted that their combination would produce an exceptional cash machine with the resources to aggressively pursue new lines of business.
Loaded With Cash
As a result of their relatively low capital and raw material expenses, General Foods has produced an average annual $150 million in cash flow over the last three years, while Philip Morris’s production has been truly spectacular: an average of almost $1 billion annually, with about $1.4 billion last year.
But the Philip Morris that results from the merger will be a debt-ridden company. Company spokesman Jonathan Rinehart said Friday that the acquisition will be financed with $1 billion in internally generated cash and the proceeds of a $6-billion credit line provided by a group of more than 40 banks, led by Citibank.
Assuming that the acquisition consumes $4.6 billion of that credit, Philip Morris’ total debt would more than double to $6.8 billion. Although some of the acquisition cost could be defrayed by the sale of some General Foods assets--its Post Cereals unit, which trails Kellogg’s and General Mills in market share, is frequently mentioned as a candidate--Philip Morris Chairman Maxwell said the company plans to “keep General Foods intact and not divest any of its operations.”
Some analysts questioned the financial wisdom of purchasing General Foods, which despite its commanding franchises in a range of consumer lines has had one of the lowest growth rates in the packaged foods industry. Some consider $120 per share a particularly lush price for a company that, until a speculative run-up following the Reynolds-Nabisco announcement in June, had been selling for slightly more than $70.
Better Deals Available
“I’m dismayed,” said David A. Goldman, a food and tobacco analyst for Dean Witter Reynolds. “There are much sexier, better heeled competitors available in the food industry, including Pillsbury, Quaker Oats and Sara Lee, all of which offer a more rapid growth rate than General Foods in real or relative terms and a more aggressive management style.” During the last five years, General Foods sales have grown by 9% annually and its earnings by 6%.
Goldman said he had downgraded his recommendation on Philip Morris to “hold/sell” from “buy” after learning that it was the unidentified telephone bidder.
General Foods management has come in for criticism on Wall Street for what Goldman termed its “country-club style of management.” Only recently has the company stepped up its crucial efforts to develop new products, and those it brought to market--including Jell-O pudding pops and Crystal Light, an aspartame-flavored drink powder--have performed unspectacularly, Goldman asserted.
The companies said Philip Morris’ tender offer will begin Monday and expire Oct. 28.
HOW GENERAL FOODS AND PHILIP MORRIS WILL MESH GENERAL FOODS AT A GLANCE
The diversified food processor, with headquarters in White Plains, N.Y., has interests in coffee, convenience foods and speciality meats. Its products include Kool-Aid and Crystal Light, Post cereals, Log Cabin syrup, Birds Eye vegetables, Jell-O, Cool Whip, D-Zerta, Shake ‘n Bake, Stove Top stuffing mix, Minute Rice, Maxwell House, Sanka, Oscar Mayer meats, and Entenmann’s and Oroweat baked goods. Financial Data Fiscal years ended March 31, in millions of dollars
1985 1984 1983 1982 1981 Revenues $9,022 $8,600 $8,256 $8,351 $6,601 Net Income $ 302.8 $ 317.1 $ 288.5 $ 200.2 $ 255.4
Revenue Contribution for Fiscal 1985
Coffee: 28% Processed Meat: 18% Packaged Foods: 42% Food service: 12%
PHILIP MORRIS AT A GLANCE
The New York-based company is the nation’s largest cigarette maker and has interests in beer, soft drinks, land development and financial services. Its major products and businesses include Marlboro, Benson & Hedges and Merit cigarettes; Miller High Life, Lite and Lowenbrau beers; 7Up, Diet 7Up and Like cola; the Mission Viejo community development firm in California and Colorado, and Philip Morris Credit Corp. Financial Data Fiscal years ended Dec. 31, in millions of dollars
1984 1983 1982 1981 1980 Revenues $13,813 $12,976 $11,586 $10,722 $9,649 Net Income $ 888.5 $ 903.5 $ 781.8 $ 659.7 $ 549.1
Revenue Contribution for 1984
Philip Morris Int’l: 27.1% Miller Brewing: 21.2% Seven-Up: 5.3% Philip Morris Industrial*: 2.0% Philip Morris U.S.A.: 44.4%
*Divested in July, 1985