Takeover Battles for Food Firms Heat to a Boil : Philip Morris in Court to Block Kraft Restructuring; Analysts Expect Higher Bid
Wall Street’s food fight was still going strong Monday as Philip Morris moved to block Kraft’s day-old restructuring plan, the two companies exchanged unpleasantries and Kraft’s stock soared.
But the Kraft-Philip Morris squabble, which began last week as the nation’s largest non-oil takeover at $11.8 billion, was dwarfed by a $20.3-billion offer Monday for RJR Nabisco by buyout specialists Kohlberg Kravis Roberts & Co. Only four days earlier, RJR Nabisco’s management had made its own $17-billion offer for the company.
Elsewhere in the food industry, shareholders of Grand Metropolitan overwhelmingly approved the London conglomerate’s hostile bid for Pillsbury and Kroger said it will launch its previously announced restructuring Friday by paying a $40-per-share cash dividend to shareholders.
Hard Choices Ahead
The action seems to be just beginning in the flurry of food takeovers, and no one is willing to rule out higher prices and new bidders. The Kraft and Philip Morris wrestling match got livelier Monday, as the two companies faced off in court and through dueling statements.
Analysts predicted that to remain competitive Philip Morris will have to sweeten its $90-per-share takeover offer for Kraft and that Kraft may have to sell some of its best parts--including Orange-based All American Gourmet--to pay off the staggering $12.4 billion in debt that its corporate overhaul will produce.
Kraft on Sunday rejected Philip Morris’ $11.8-billion cash takeover offer as “inadequate.” Instead, the Glenview, Ill., food company proposed a $13.2-billion restructuring that would pay shareholders at least $110 per share--that is, $84 a share in cash, $14 a share in high-yield debentures, or “junk bonds,” and the remainder in the continuing trading value of Kraft stock, which will certainly be reduced by the market from current levels.
New York-based Philip Morris immediately filed a motion in U.S. District Court in Chicago asking the court to stop Kraft from selling assets, creating new securities or taking any other steps to enact its restructuring. The request for a temporary restraining order was not granted.
Philip Morris responded Monday by charging that Kraft’s recapitalization announcement “raises serious questions as to the feasibility of the plan and the real value ultimately to be delivered to shareholders.”
Feasibility Questioned
The company said Kraft’s plans could take months to complete, gave no assurances as to the value of Kraft’s stock after the overhaul or the trading value of the “junk” securities and left open questions about the feasibility of financing the cash portion of the offer, which should cost Kraft a little more than $10 billion.
“The Kraft recapitalization plan stands in sharp contrast to our all-cash offer. The Kraft plan will require breaking up the company and burdening what is left with an enormous debt load, mortgaging its future,” said Hamish Maxwell, chairman and chief executive of Philip Morris Cos.
“In contrast, our plan would keep Kraft intact,” he said. “We want to build Kraft’s current businesses both in the United States and in foreign markets.”
Kraft fired back, saying that “disparaging remarks made today by Philip Morris Cos. Inc. regarding Kraft’s recapitalization plan are totally consistent with Philip Morris’ pressure tactics to buy Kraft on the cheap.”
Kraft said it “will not be pressured and will let (Kraft) shareholders determine which offer is better for them.”
Kraft’s stock price jumped $10 a share Monday to close at $102 on the New York Stock Exchange. It was the second most actively traded issue on the Big Board, with 7.8 million shares changing hands. Kraft’s stock had been trading in the $60 range before the Philip Morris offer.
Analysts said Kraft’s offer provides a better value for shareholders despite the lack of information about the securities Kraft will sell or the uncertainty over the remaining value of Kraft stock.
“If Philip Morris wants to play, they’d better increase their bid,” said Roger W. Spencer, who follows Kraft for Paine Webber.
The Kraft offer “is $15 to $20 better,” said William Maguire, an analyst for Merrill Lynch. “It forces Philip Morris to take another look at a higher price.”
Kraft has said it will sell assets that make up about 20% of profits but has declined to say which businesses it is looking at. The company said it would retain its core businesses and major brands, which account for about 80% of earnings.
Brand Names on Line
Analysts speculated that recent acquisitions in the dairy industry--including the Frusen Gladje ice cream operation--as well as food service, food ingredient and frozen food businesses might be put on the block.
All American Gourmet, which manufactures the Budget Gourmet line of frozen dinners, “may have to go because it would fetch a pretty penny,” Maguire said.
But Ronald B. Morrow, an analyst with Smith Barney, said Kraft will have a hard time bypassing its major brand names in the asset sale because they will bring the best prices at a time the company will desperately need cash to pay down its debt.
“They’re between a rock and a hard place,” he said. “They’ll sell anything and everything to service that $12.4-billion debt.”
Kraft has “not a prayer” in keeping its well-known brands intact in the face of such debt, Morrow said. Kraft’s big-name brands include Velveeta, Miracle Whip, Breyers ice cream and Seven Seas salad dressing.
“The food service business is going to be tough,” Morrow said. “They’ve been the buyers of the food service companies, and I think they’re going to have a hard time selling them, particularly at the prices they paid.”
In other food industry takeover developments, 92% of shareholders voting at a special meeting held in London by Grand Metropolitan approved the food and liquor conglomerate’s hostile $60-a-share bid for Pillsbury of Minneapolis. Shareholders also approved the sale of Grand Met’s Inter-Continental Hotel chain to Saison Group of Japan for $2.36 billion.
Pillsbury had no comment on the announcement. Pillsbury is resisting the takeover attempt and has said it is reviewing several options, including issuing a substantial dividend to Pillsbury shareholders, selling an equity interest in one or more of its subsidiaries or selling main assets.
