Union Carbide to Recapitalize, Take Major Loss : Ailing Firm Will Buy Back $2.5 Billion in Bonds, Issue Stock, Sell Assets

Union Carbide, still reeling from the cost of the $2.5 billion in debt that it raised this year for a takeover defense, Tuesday announced a major recapitalization plan aimed at cutting its annual interest expense by about $120 million after taxes.

The plan, comprising a tender offer for the $2.5 billion in high-priced debt issued last January, a $500-million stock placement early next year and $1.1 billion in asset sales in 1987, will produce an extraordinary loss for this year that some financial professionals estimated at close to $300 million.

But many securities analysts praised the program as a means of taking advantage of the new federal tax law and sharp reductions in interest rates to strengthen the company’s overall balance sheet.

“They’re drowning in debt, and the whole point of this plan is to materially reduce their interest bill,” said Paul T. Leming, an analyst for Kidder, Peabody & Co.

The expected interest savings will be so great that it will enable the company to issue its new stock next year without any significant dilution of per-share earnings, Leming said.

Tuesday’s announcement covers the latest in a long line of restructurings during what has been the most difficult period in the chemical company’s history. In December, 1984, a cloud of poison gas emitted by a Carbide plant in Bhopal, India, killed thousands of persons and seriously injured hundreds of thousands more. The company’s liability for the disaster is now before Indian courts.

Rebuffed Takeover Bid

Its weakened condition following the tragedy made it vulnerable to corporate raiders, and last January Carbide undertook a drastic plan to rebuff a $5.5-billion takeover bid from GAF Corp. In that move, Carbide doubled its debt load and cut its own size by more than one-third by selling off such familiar product lines as Eveready batteries, Glad plastic wrap and Prestone and Simoniz automotive products.

GAF withdrew after Carbide used $2.5 billion in bond borrowings to repurchase 55% of its own shares.

The keystone of the latest recapitalization is a tender offer for those bonds, which carry an overall annual interest rate of 14.2%, considered too high in light of the company’s general creditworthiness and today’s lower interest rates. The company will finance its repurchase by a combination of bank loans and temporary financings carrying an expected interest rate of only 11.2%.

Carbide will offer a premium to bondholders of as much as 33% over the face value of the bonds to persuade the holders to turn them in. The bonds are otherwise non-callable, meaning that the company cannot unilaterally redeem them until 1990.

Analysts noted that the exchange offer takes advantage of the Jan. 1 change in the federal tax law, which eliminates preferential tax rates for capital gains and thus would result in higher taxes on the profits that most bondholders will earn from the offer.

“If Union Carbide waited until next year,” said James H. Wilbur, an analyst for Smith Barney, Harris Upham & Co., “they would have had to offer a higher price.”

The offer is conditioned upon at least 80% of the bonds being tendered, and its cost of at least $445 million will be charged against fourth-quarter earnings, the company said.

Most analysts have been expecting Carbide to turn a profit of only about $160 million this year, meaning that the one-time charge would produce a loss for the year of at least $285 million.

With the debt-service reduction and expected proceeds of $1.1 billion from the sale of its agricultural products and electronic components businesses and the sale and lease-back of its Danbury, Conn., headquarters, Carbide may earn as much as $2 to $2.25 a share next year, analysts say.

That figure includes the issuance of 25 million new shares to add to its roughly 100 million shares outstanding today.

The company said in a Securities and Exchange Commission filing made Tuesday to cover the new-share issue that it expects the asset sales to be completed in the first half of 1987 but noted that it has no binding commitments yet for such sales.