Beatrice Seen Nearing End as an Independent
Kohlberg Kravis Roberts’ offer to buy out Beatrice Cos. might be the beginning of the end of Beatrice as an independent food and consumer products company, according to some analysts.
The Chicago-based firm, founded in 1894, received a formal written offer on Thursday from Kohlberg Kravis, a New York investment firm specializing in leveraged buy-outs. Kohlberg Kravis, which first made known its plans on Wednesday, offered $40 cash and $5 in preferred stock for each share of common stock.
The total transaction is valued at $4.9 billion and is believed to be the biggest leveraged buy-out in history. In a leveraged buy-out, an investment group finances the acquisition of a company with borrowed funds, using the target company’s anticipated earnings, or liquidation proceeds, as collateral.
The offer is expected to set off competitive bidding for troubled Beatrice, which has suffered through a turbulent 14 months since its $2.7-billion cash acquisition of Esmark in August, 1984. Analysts say that, even if the Kohlberg Kravis offer fails, Beatrice is likely to lose its independence and be snapped up by someone else.
“As far as I’m concerned, it (Beatrice) is not going to be a public corporation unless it becomes part of another public company. I don’t think it will be a surviving entity on the stock market,” said Marvin B. Roffman, an analyst with Philadelphia-based Janney Montgomery Scott.
Beatrice had no comment on the offer but said it was urging shareholders not to take any action until the board of directors considers it.
Beatrice’s acquisition of Esmark, which was designed to provide Beatrice with a vast nationwide distribution network for its well-known consumer products, left the company with a myriad of problems. Beatrice has been burdened with a heavy debt load, and the process of digesting Esmark has been costly both to the morale and bottom line of Beatrice.
In the midst of major spinoffs of operations to whittle down its debt, Beatrice has been troubled by a revolving executive door as a number of key executives left under the controversial and autocratic rule of James L. Dutt, who was ousted as chairman and chief executive last August.
To replace Dutt, Beatrice called back 66-year-old William W. Granger Jr., its former vice chairman, to run the company. It also recalled William G. Karnes, its 74-year-old retired chairman and chief executive, to serve on the company’s board.
The management shuffle was largely perceived as an interim move, although the company has insisted otherwise. “There is no strong management group, which makes them vulnerable,” explained Ken Bordenstein, senior vice president and an expert on mergers and acquisitions at the Los Angeles office of Duff & Phelps.
Analysts noted that the new management team, which earlier this month announced further divestitures--including Avis--has not been in place long enough to be judged as having any significant impact on Beatrice. Thus, they say, the recent run-up in the company’s stock--from about $30 a share in August--is attributable mostly to the recent rumors of the firm as a takeover candidate and not to any fundamental change in the company.
Beatrice’s stock hit a new high of $46.625 on Thursday on the New York Stock Exchange but closed at $46.125, up $1.75, on a volume of 5.9 million shares. With the price topping Kohlberg Kravis’ $45-a-share offer, some analysts believe that Beatrice management may reject the offer or bring in a “white knight” for a friendly merger. Rumors on Wall Street have centered on Unilever, the European food and consumer products giant, or Seagram Co., the Montreal-based liquor and wine firm, as possible candidates.
In releasing a copy of its formal written offer, Kohlberg Kravis said: “We believe our offer represents a fair price to your shareholders.” It also said that it had obtained a commitment from an unidentified major bank to arrange a $3.5-billion revolving credit line. In addition, Drexel Burnham Lambert, a New York investment firm that specializes in so-called junk bond--or high-interest, low-rated--financing, will help arrange other necessary funds.
In the first half of fiscal 1986, which ended Aug. 31, Beatrice had net earnings of $128 million, compared to $133 million, excluding a number of non-recurring items. Sales totaled $6.2 billion, compared to $5.4 billion a year ago.
At the end of the six-month period, Beatrice’s debt-to-equity ratio was down to 45% from a high of 66% at the end of fiscal 1985, which ended Feb. 28. The company had proceeds of about $1.7 billion from its divestiture program, which is about 85% complete. It earned $435 million from a common stock offering in July and sold its STP unit to Union Carbide for $87 million that same month.
Kohlberg Kravis said that it has no plans to liquidate Beatrice and that it intends to maintain the firm’s headquarters in Chicago and keep its decentralized structure. It also said key Beatrice executives will be invited to join the leveraged buy-out group. To expedite the offer, Kohlberg Kravis said it was prepared to discuss making a cash tender offer and was prepared to meet immediately with Beatrice, from which it expected a response by Oct. 24.
Donald P. Kelly, former chairman of Esmark, is part of the Kohlberg Kravis group. He would not take a telephone call but said through his telephone receptionist that he had no comment.
