Philip Morris Sees No Antitrust Snags; Kraft Stock Soars $28
Facing a surprise takeover offer from Philip Morris Cos., Kraft saw its stock price leap $28.125 a share on Tuesday as Wall Street analysts predicted that the food company’s days as an independent firm may be nearing an end.
Meanwhile, Philip Morris Chairman Hamish Maxwell said he will vigorously pursue Kraft, an acquisition that would vault his firm, already the nation’s largest consumer products firm, past Unilever, the Anglo-Dutch firm, to become the world’s largest.
Maxwell expressed confidence that government officials would not stand in the way of the huge merger. “We looked at it extremely thoroughly and we’re convinced that there are no significant antitrust problems at all,” he said in an interview.
Kraft, based in Glenview, Ill., has not formally responded to the $11.8-billion, or $90-per-share, cash bid made by the New York-based food and tobacco giant Monday but repeated the company’s general desire to remain independent.
During the past several years, Kraft has moved to boost its stock price and recast itself, once again becoming an “all food” company for the first time in more than 30 years.
For the most part, stock market analysts said Philip Morris has made a strong offer for Kraft. Corporate dickering could take the price slightly higher, they said, but the chances of a “white knight” coming to rescue Kraft or of a bidding war erupting are slim.
“You can’t argue with that price,” said Edward Froelich, an analyst who follows the two companies for Pershing & Co. “It may be high enough to hold out just about everybody else.”
Board Would Be Liable
While Kraft’s “poison pill” defense could prove an obstacle, the high offer--a 50% premium over the Monday price of Kraft’s stock and 26 times Kraft’s earnings from continuing operations in the last four quarters--could force management to cave in or come up with a better alternative. Philip Morris has filed suit to force Kraft to revoke the defense, which gives shareholders the right to buy stock in the merged company at half price if a hostile bidder buys more than 20% of the company.
“You have a firm number on the table. If the board does anything deleterious to shareholder value, like a dumb acquisition that would put the stock down, they’re liable,” said Roger W. Spencer, a Chicago-based analyst with Paine Webber Inc.
“It’s like an appraiser and a piece of real estate,” he said. “If there aren’t any more buyers for this . . . they might get it at $90 or a tad better.”
Wall Street reacted enthusiastically Tuesday by pushing Kraft’s stock up $28.125 to close at $88.25 a share, just below Philip Morris’ offer. Kraft was the most actively traded stock on the New York Stock Exchange, with 9.84 million shares changing hands.
Philip Morris was third on the most active list with 3.88 million shares traded. Its stock price fell $4.50 to $95.50, reflecting shareholder worries about the effect of such a large acquisition on company earnings.
Both Standard & Poor’s and Moody’s debt rating agencies placed Philip Morris’ and Kraft’s debt on their surveillance lists for possible downgrade, reflecting the increased strain a large purchase would put on Philip Morris’ balance sheet and the impact of any defensive moves Kraft might make.
Philip Morris had been rumored to be on the takeover hunt and at one time Wall Street rumormongers linked its name with Quaker Oats. Kraft is seen as fitting well into Philip Morris operations because there is little overlap with the products of Philip Morris’ General Foods subsidiary.
Maxwell reiterated that Philip Morris would operate Kraft independently under existing management.
“It’s a well-managed company, and I don’t think anybody would say anything else,” Maxwell said. “We need Kraft management. We don’t have a team of people waiting to be pushed into it any more than we did with General Foods.”
Maxwell noted that he’s not interested in breaking up Kraft. The acquisition would give Philip Morris better opportunities to penetrate the Asian market as well as better opportunities to deal with Europe after 1992 when European countries drop most trade barriers with each other, he said.
While the deal was proposed as a friendly acquisition in which Philip Morris is willing to negotiate “all aspects” of the offer, Maxwell is intent on capturing Kraft. “We’re quite determined to carry it through to a successful conclusion,” he said.
In a filing Tuesday with the Securities and Exchange Commission, Philip Morris said it will pay for Kraft with its own corporate funds and with borrowings. It already has a $6-million unsecured line of credit from a syndicate of U.S. and foreign banks and expects to receive another $6 million in borrowed funds.
The Kraft that Philip Morris is after is a much different company than it was only three years ago.
Kraft in 1986 was known as Dart & Kraft and was a jumble of businesses, some of them money losers that had been brought together through Kraft’s 1980 merger with Los Angeles-based Dart Industries.
Focused on Food
In 1986, the company decided its mission was to become the world’s leading food company and it spun off the bulk of its non-food businesses--names like Tupperware and West Bend--to shareholders as a company called Premark International. It changed its name back to Kraft, the name it started with in 1903 when James L. Kraft started wholesaling cheese in Chicago from a rented horse-drawn wagon.
As it was selling most of its non-food businesses, Kraft launched an aggressive acquisition program that emphasized frozen-food companies and regional food-service firms--two growth areas in the food industry. It has spent some $1.3-billion on acquisitions since 1986, including several in California.
Kraft’s California holdings include Orange-based All American Gourmet Co., a frozen-food manufacturer, and the Knudsen-Foremost dairy operations in Los Angeles. Of its 47,000 employees worldwide, Kraft employs 2,300 in California of which 1,750 are in Southern California.
In June, Kraft sold its Duracell batteries division, ridding it of all its non-food operations.
Kraft’s strategies appear to be working. All but lost in the takeover din was Kraft’s announcement Tuesday that net income rose 17.2% to $148.7 million while net sales increased 11.5% to $2.8 billion.
“That really was a good quarter, but nobody cared,” analyst Spencer said. “They said, ‘$90 is all we care about.’ ”
