Tobacco Firm to Buy Nabisco for $14.9 Billion

By MELINDA FULMER

June 26, 2000 12 AM PT

TIMES STAFF WRITER

Philip Morris Cos., parent of Kraft Foods, on Sunday agreed to buy cookie and cracker giant Nabisco Holdings Corp. for $14.9 billion, making the nation’s largest food company even more powerful with brands on virtually every supermarket aisle.

The announcement comes at a time when many of the largest players in the slow-growing food business have been looking to consolidate in order to cut costs, boost sales and increase their clout with grocery retailers. At the same time, Philip Morris, the world’s biggest tobacco company, signaled that the deal will help lift the cloud of smoking-related lawsuits that has been a drag on its food business.

Adding Nabisco’s top-selling brands such as Ritz crackers, Oreo cookies, Grey Poupon mustard and Planters nuts will give Kraft a total of 73 brands with sales of more than $100 million each, and make it an instant behemoth in the packaged-snack sector, one of the fastest-growing food categories.

And while the new food company would see millions of dollars in savings as it combines operations, consumers are not likely to see lower prices.

“This creates a food dynamo on par or better than Nestle,” the world’s largest food company, said industry analyst John McMillin. “And it gets Kraft some growth

brands that can travel.”

The proposed acquisition would put Nabisco, which until a year ago was part of tobacco company RJR Nabisco Holdings Corp., back in the stable of a tobacco company. However, analysts say Philip Morris will probably spin off the food business as a separate company, just as RJR Nabisco split Nabisco Holdings from its tobacco company last summer.

Under the terms of the deal, Philip Morris will pay $55 a share in cash, a 6.5% premium to Nabisco Holdings’ close on Friday, and assume $4 billion in debt. Following the deal, Kraft plans to sell less than 20% of the new food company’s stock in a public offering and use the proceeds to pay down the debt.

Analysts say the planned stock sale sets the stage for Philip Morris to completely separate its food concern from its tobacco business, which is facing billions of dollars in legal settlements and other lawsuits that are pending. A spinoff would free the highly profitable Kraft from the depressing effects of ongoing anti-tobacco litigation and regulation.

A Change in Strategy for Philip Morris

“It’s an important strategic change in thinking,” says Martin Feldman, an analyst at Salomon Smith Barney Inc. in New York. “Previously, Philip Morris had resisted any change in its corporate structure.”

Sunday’s announcement was a two-pronged transaction. Philip Morris said it would also sell Nabisco’s parent company, Nabisco Group Holdings Corp.--a cash-filled corporate shell--for $9.8 billion, or $30 a share, to R.J. Reynolds Tobacco, the cigarette company formed when RJR Nabisco split its food and tobacco businesses a year ago.

In purchasing Nabisco Group Holdings, RJR will profit to the tune of $1.5 billion, analysts said, without adding to its tobacco-litigation exposure or taking on additional debt.

RJR, like Philip Morris and other major tobacco companies, agreed two years ago to settle lawsuits brought by the states for a total of $246 billion to be paid over 25 years. But the tobacco firms still face hundreds of lawsuits brought by individuals and separate class-action suits.

“They are basically buying cash at a 15% discount and taking on their own risk of litigation,” said Feldman.

The acquisition comes at a time of rapid consolidation in the global food industry. Just three weeks ago Unilever agreed to buy Bestfoods for $24.3 billion. ConAgra, whose brands include Butterball turkeys and Orville Redenbacher popcorn, agreed last week to pay $1.6 billion for International Foods, maker of Chef Boyardee pasta products. Kraft, maker of Post cereals and Oscar Mayer meats, and Nabisco Holdings had about $35 billion in combined sales in 1999. With Nabisco under its umbrella, Philip Morris’ Kraft unit would surpass Unilever-Bestfoods as the second-biggest global food company behind Nestle.

Despite the huge clout the acquisition gives Kraft, it won’t likely arouse antitrust concerns, analysts said, because both companies have very different products. Nabisco is the dominant player in the cookie and cracker business, having a 35% and 47% share of those categories, respectively, while Kraft dominates in the cheese business and owns other popular dinner-time brands such as Kraft Macaroni and Cheese, Stove Top Stuffing, Minute Rice, Jell-O and Maxwell House coffee.

However, the combination would allow the new company to cut costs and operate more efficiently than its competitors, important since sales growth in the food business has slowed to 2% to 3% a year. The combination could also force competitors to acquire more brands in order to retain a sizable presence on store shelves.

Annual cost savings from the deal could surpass $400 million in 2002 and increase to about $600 million by 2003, Philip Morris said.

‘Where American Food Is Going’

“The combination of Kraft and Nabisco will create the most dynamic company in the food business both in terms of absolute earnings levels and revenue and earnings growth rates,” said Geoffrey C. Bible, chairman and chief executive of Philip Morris, in a statement.

The cost savings could translate into new products for the public.

“There are benefits for consumers, not necessarily in lower prices but in terms of product innovation and convenience,” says Philip Morris spokesman Christopher Kircher.

The biggest benefit of the merger would be Kraft’s opportunity to leverage the appeal of Nabisco’s popular snack foods, which are growing more rapidly than its own brands.

“It gets them in fast-growing areas like cookies,” said McMillin of Prudential Securities in New York. “This is where American food is going.”

The announcement ended a bidding war that had involved financier Carl Icahn as well as a joint bid of $49 a share by France’s Danone Group and Britain’s Cadbury Schweppes.

Nabisco Group, which owns 80.6% of Nabisco Holdings, put both companies up for sale in April after Icahn initiated his fourth bid in five years to wrest control of Nabisco Group.

Icahn, the biggest individual shareholder in Nabisco Group at 9.6%, disclosed Thursday in a federal filing that he had offered $28 a share for the company, or $8.3 billion. Icahn earlier offered $22 a share.

The companies said they expect the deal, which still needs shareholder and regulatory approval, to be completed by October.

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Food Giants

The acquisition of Nabisco will enable Philip Morris to retain its position as the world’s second-largest food company after Swiss giant Nestle. Combining Nabisco with its Kraft Foods business will make it a packaged-food powerhouse whose brands will dominate supermarket shelves. A sampling of products owned by Kraft and Nabisco:

Kraft brands

Maxwell House

Kool-Aid

Grape-Nuts

Raisin Bran

Miracle Whip

Altoids mints

Shake ‘N Bake

Kraft Macaroni and Cheese

Stove Top stuffing mix

DiGiorno

Velveeta