Kraft Inc. said Sunday that it agreed to be acquired by Philip Morris Cos. for $13.1 billion, or $106 per share, in what would be the nation's largest non-oil merger ever.
The agreement--which came after Philip Morris agreed late Friday to sweeten an earlier $11.2-billion, $90-a-share offer that Kraft had rejected--will make Philip Morris the world's largest consumer products company, surpassing the Anglo-Dutch conglomerate Unilever. The deal will give Philip Morris more than $15 billion in annual food product revenues and add such well-known Kraft brands as Velveeta, Miracle Whip and Parkay to its current lines of such familiar names as Maxwell House, Jell-O and Oscar Mayer.
The acquisition price will make the deal the second-largest U.S. merger ever, topped only by Chevron Corp.'s $13.3-billion acquisition of Gulf Oil Corp. in 1984.
Wave of Takeover Offers
The deal also is one of the largest in an unprecedented wave of multibillion-dollar takeover offers in recent weeks, most involving big names in food and retailing, such as RJR Nabisco and Pillsbury. The biggest of the current wave are two pending offers for RJR Nabisco, totaling $20.3 billion and $17.6 billion, that have shattered previous perceptions as to how much acquirers would be willing to pay for companies.
But the deals also have deepened concerns that the merger mania may be getting out of hand. Some labor leaders and others have expressed fears that the mega-mergers will result in the breakup of the companies and possible job losses as the acquirers find that they need to sell assets or cut costs to pay off debts incurred in financing the takeovers. Others express concern that the deals will result in less competition and thus higher prices for consumers.
The recent deals also have sparked renewed concerns from Federal Reserve Board Chairman Alan Greenspan and other regulators and business leaders that American corporations may be taking on too much debt, creating a speculative bubble that could burst with a recession or sharp increase in interest rates. That, in turn, could cause a wave of bankruptcies and defaults and strain a banking system already reeling under the highest failure rate since the Depression, some experts fear.
Some Cite Stable Revenues
Others, however, contend that companies like Philip Morris that are taking on the most takeover-related debts are in such industries as food, retailing and consumer products that enjoy relatively stable revenues and thus are best able to weather a recession.
The move by Philip Morris, already the nation's largest tobacco firm, also represents the latest attempt by giant tobacco companies to diversify into other industries and reduce their dependence on cigarettes, a declining business in the United States. As part of that effort, Philip Morris acquired General Foods in 1985 for $5.6 billion, and R.J. Reynolds became RJR Nabisco in 1985 by purchasing Nabisco Brands for $4.9 billion.
"We believe the combination of Philip Morris and Kraft will create a U.S.-based food company that will compete more effectively in world food markets," Hamish Maxwell, Philip Morris chairman and chief executive, said Sunday.
John M. Richman, Kraft's chairman and chief executive, said that "our shareholders are receiving full value, and this merger is the best possible outcome for our employees, customers and the communities in which we operate."
The merger agreement calls for Kraft shareholders to receive $106 per share in cash through a tender offer that is already under way and scheduled to expire Nov. 15, unless extended. Kraft stock closed Friday at $96.50 a share in New York Stock Exchange trading, up $2 that day but up more than $36 from its price on Oct. 17, when Philip Morris announced its original offer.
The deal still calls for regulatory approval from the Federal Trade Commission. But Philip Morris spokesman George Knox said Sunday that the company did not foresee any difficulties, contending that Kraft products do not overlap with those made by Philip Morris and its General Foods subsidiary.
No Part of Kraft to Be Sold
The Philip Morris spokesman said that Kraft will be managed as a separate subsidiary and that no Kraft assets or businesses will be sold to pay off the debt incurred. Philip Morris plans to finance the deal through $1.5 billion of its own cash and $12 billion in credit lines provided by New York's Citibank and 63 other U.S. and foreign banks, Knox said. The company should pay off the debt in five years through its own cash flow from operations, he said.
The accord was reached after presentation of the sweetened bid by Philip Morris executives to Kraft officials late Friday, spokesmen for both firms said. Kraft managers agreed to the bid Saturday, and Kraft's board of directors gave its approval on Sunday, the spokesmen said.
The agreement comes just five days after Kraft said it would negotiate with Philip Morris only if the tobacco and consumer products company raised its initial $90-a-share offer to equal the value of an alternative plan proposed by Kraft that would have kept it independent.
Sales Under Kraft Plan
That proposal, which would have paid Kraft shareholders between $100 and $105 a share, according to most analysts' estimates, was designed to repel the original Philip Morris bid or force a higher offer. But, although it would have kept Kraft independent, it also would have saddled it with billions of dollars in new debt and forced it to sell off assets to pay down the borrowings.
Under the merger agreement, Kraft's Richman and up to two other Kraft directors will join Philip Morris' board of directors. Richman also will become a vice chairman of Philip Morris with responsibilities of overseeing Kraft. Michael A. Miles, Kraft's president and chief operating officer, will become Kraft's president and chief executive, reporting to Richman.
Other multibillion-dollar takeover bids this month include a $5.2-billion hostile bid for Pillsbury by Britain's Grand Metropolitan PLC, and a $1.4-billion bid for West Point-Pepperell by rival textile maker Farley Inc. The two bids for RJR Nabisco are one valued at $20.3 billion from the investment firm of Kohlberg Kravis Roberts, and another totaling $17.6 billion led by RJR Nabisco management.
Kraft, based in Glenview, Ill., is the nation's biggest independent food company. It had profits of $489 million on revenues of $9.9 billion last year. Others of its brands include Philadelphia cream cheese, Breyers and Frusen Gladje ice creams and Cheez Whiz cheese spread.
Philip Morris, based in New York, earned $1.84 billion on revenues of $27.7 billion in 1987. Philip Morris owns such brands as Brim, Sanka and Yuban coffees, Bird's Eye frozen vegetables, Grape-Nuts and Raisin Bran cereals, Miller and Lowenbrau beers and Marlboro, Virginia Slims and Benson & Hedges cigarettes.