In a dramatic bid for independence, food and dairy giant Kraft Inc. rejected an $11.8-billion takeover by Philip Morris Cos. on Sunday and announced instead a major corporate overhaul that it said would plunge the company deeply into debt.
Kraft said the plan would be worth an extra $20 per share to its stockholders, compared to the Philip Morris offer. But it said the restructuring would involve the sale of assets accounting for about 20% of earnings and would put the company more than $12.4 billion into debt.
John M. Richman, Kraft’s chairman and chief executive, said in a letter to shareholders released late Sunday that the company’s financial advisers, Goldman Sachs & Co., called the Philip Morris offer inadequate. He said: “Your board believes that we should take action to maximize shareholder value rather than accept an inadequate offer.”
He cited the Goldman Sachs opinion and the fact that Kraft stock has been trading at more than the $90-per-share offer as evidence that it is too low. Kraft said its restructuring would be worth at least $110 per share to stockholders.
Kraft shares closed Friday at $92 per share after trading in the $60 range before the Philip Morris offer.
“At the same time, both your board and company management recognize that, as a practical matter, the Philip Morris bid makes it impossible for us to go back to the situation that existed prior to the bid,” Richman said.
Referring to the investment climate that has seen a revival of merger mania this year and to the disruption that Kraft’s plan will cause, Richman portrayed his company as one forced by others to take drastic short-term defensive action.
He said that “today’s situation is not of our making . . . . Rather, it is the product of current era investment policies and financial attitudes that favor short-term financial gratification over steady, long-term growth and the need to provide a sound economy for future generations.”
He did not specify the “dislocations and hardships that the plan we contemplate will cause,” but such restructuring often causes extensive job loss or other turmoil for workers. Kraft employs 46,500. The company also did not say what properties it will sell.
The bid by Philip Morris last week would make it the world’s largest consumer products firm instead of merely the nation’s largest. Despite previous diversification moves into food and brewing, tobacco--especially the Marlboro, Benson & Hedges, Virginia Slims and Merit cigarette brands--still accounts for 53% of its sales and 80% of its profits.
In 1985, New York-based Philip Morris made its biggest diversification move to date with the $5.6-billion takeover of General Foods, giving it Jell-O, Maxwell House coffee, Oscar Mayer and other familiar products. It also brews Miller and Lowenbrau beers.
Shedding Some Operations
Kraft, based in Glenview, Ill., has been shedding its non-food operations. It recently sold its Duracell battery unit and became an “all-food” company for the first time in 30 years. Kraft has grocery, dairy and packaged products under dozens of familiar brand names ranging from Miracle Whip to Bird’s Eye.
Kraft’s defensive move comes amid a period of enormous tumult in the business of food and other consumer products. Huge competing supermarket chains have merged, leaving some neighborhoods with substantially less choice in where to shop. Tobacco companies are seeking to move well beyond the stagnating business of cigarettes by buying their way into the food business. And companies with a variety of interests have pursued food companies with an eye on the tremendous money-making attributes of established brand names.
Pillsbury, whose brand names include Green Giant and Haagen Dazs in addition to the Burger King chain, is fending off a $5.3-billion takeover attempt by Grand Metropolitan PLC, a British producer of wine and spirits. To symbolize its fighting spirit, the food company has run advertisements with a defiant Pillsbury doughboy sporting boxing gloves.
RJR Nabisco Offer
One consumer products giant, RJR Nabisco, last Friday disclosed some stunning news of its own. The company’s executives proposed to purchase the food and tobacco outfit in a debt-heavy, $17-billion buyout. The management bid for RJR Nabisco--whose products include Oreo cookies, Ritz crackers, Planters peanuts, Del Monte canned fruits and vegetables and Winston, Salem and Camel cigarettes--would represent the largest corporate purchase in history.
At $11.8 billion, a Philip Morris-Kraft union would be second in size only to the Chevron-Gulf merger of 1984. However, the deal would be dwarfed by the proposed RJR Nabisco deal.
Richman said that Kraft’s recapitalization plan would include a distribution of cash and securities totaling about $98 per share but that shareholders would also retain their common stock interest in Kraft.
He said that the detailed plan will be submitted to the board for approval in the “very near future” and that it will be put before shareholders at a special meeting.
Core Businesses to Be Kept
Richman said Kraft would retain its core businesses and key brands, which now make for about 80% of profits. The company would borrow more than $6.8 billion from banks and sell $3 billion in debt. He said Kraft has already begun some of the transactions.
But he said Kraft would consider a better offer from Philip Morris or anyone else.
Richman also disclosed several exchanges between the two firms Friday, and said Philip Morris asked for immediate negotiations. He said Kraft told its suitor that it would meet Saturday if Philip Morris “were prepared to offer a realistic price.”
Philip Morris “replied that they completely disagree with our opinion of their $90 price, that they believe $90 represents full value and they would not tell us what price they are prepared to offer,” Richman said in his letter to shareholders.
“Because the restructured Kraft will have more than $12.4 billion in debt and require herculean efforts by our employees,” Richman said, the recapitalization plan will provide major equity incentives for employees through stock options and an employee stock ownership plan. He described the structure as similar to those used in sponsored leveraged buyouts.