Philip Morris to buy Nabisco for $14.9 bn

Morris had widely been viewed as the most likely winner. A source originally valued the Philip Morris deal at $15.9 billion.

Under the terms of the agreements, Philip Morris will acquire all the outstanding shares of Nabisco Holdings, including Nabisco Group Holdings’ 80.6 percent interest in Nabisco Holdings.

After that sale is completed, RJ Reynolds Tobacco will acquire all the outstanding shares of Nabisco Group Holdings for $9.8 billion in a deal that values the holding company at $30 a share. The primary asset of Nabisco Group Holdings after the completion of the sale of the Nabisco foods company to Philip Morris will be about about $11.8 billion in cash, R.J. Reynolds said.

The acquisition of Nabisco will enable Philip Morris to retain its position as the world’s second-largest food company after Swiss giant Nestle. That ranking had been threatened by Unilever’s recent deal to buy rival Bestfoods for $20.3 billion, which would have reduced Philip Morris to the No 3 spot.

Philip Morris said it plans an initial public offering (IPO) for less than 20 per cent of the newly-combined food operations following the completion of the Nabisco acquisition. Proceeds from the IPO will be used to pay off the $4 billion in Nabisco debt that will be assumed by Philip Morris as part of the deal.

The sale of both companies was fuelled by an unsolicited takeover bid from financier Carl Icahn who initially sought to buy the holding company. Nabisco eventually put both businesses on the auction block and Icahn raised his offer several Times, saying last week he could potentially pay $31 a share for the holding company.

Meanwhile, the food operations drew a host of interested parties. Britain’s Cadbury Schweppes Plc teamed up with France’s Groupe Danone to submit a bid of less than $50 a share last week. A source close to the situation said the Cadbury-Danone partnership raised its bid several Times over the weekend, but offered only about $52 or $53 a share. The Nabisco board then met Sunday to accept the Philip Morris offer.

The price tag being paid by Philip Morris falls short of many industry expectations, especially as Nabisco had drawn intense bidding interest from overseas suitors. Some industry analysts had pegged a winning bid near $60 a share. "The IPO will underscore the value of our tremendous food assets and will preserve our flexibility and Financial wherewithal to enhance Philip Morris’ shareholder value," Philip Morris chairman Geoffrey Bible said in a news release.

The Union of the holding company with RJR will essentially put the group’s risk of tobacco litigation under one roof. Because RJR was once part of the Nabisco holding company both the holding company and RJR were assumed to carry tobacco litigation risk. The tobacco operations were spun off last year as part of a massive restructuring of the company formerly known as RJR Nabisco Holdings Group.

The deal is the latest change in ownership for Nabisco which became a symbol of the tumultuous leveraged buyout period in the 1980’s and was chronicled in the best-selling book, "Barbarians at the Gate". In addition to the Kraft food brand, the Philip Morris division also owns names such as Minute Rice, Jell-O and Stove Top stuffing. Philip Morris also owns a stable of cigarette brands like Marlboro and the Miller Brewing Company.

The combined Philip Morris-Nabisco is expected to create acompany with 1999 pro forma revenues of $86.6 billion. Food revenues from Kraft and Nabisco would total $34.9 billion on a pro forma basis. Philip Morris said the deal will yield more than $400 million in cost savings in 2002, growing to about $600 million by 2003. The Nabisco deal is expected to be completed in October and the Kraft IPO is expected to be completed early next year.

"It was a successful auction for Nabisco shareholders.Kraft has been one of the more successful food companies, but with Nabisco, it gives it a better growth profile," said Prudential Securities analyst John McMillin, adding he expected Philip Morris shareholders to be "thrilled" with the Kraft IPO.

After the deal, Northbrook, Ill-based Kraft will have a 13 per cent share in the world cookie and cracker market. The Nabisco deal will add another 18 brands to its stable of 55 brands that each generate more than $100 million in annual sales. "The deal puts Philip Morris in a tremendously strong position as it ensures Kraft’s profit growth for the next few years," said Salomon Smith Barney analyst Martin Feldman.

Industry analysts widely expect the food consolidation trend to continue. The race for food deals began a few months ago when Unilever bought Slim Fast and ice cream maker Ben & Jerry’s and its hunger for US companies was capped earlier this month by the Unilever deal.

And just Friday, ConAgra, owner of brands like Orville Redenbacher and Swiss Miss, Agreed to buy International Home Foods for $1.63 billion in cash and stock. International Home Foods is the maker of Bumble Bee tuna, Gulden’s mustard and other big-name products. Experts are expected to pay close attention to any reaction by Nestle, which so far has not jumped into the hunt for big acquisitions because of potential antitrust issues. Furthermore, the Swiss company has been focusing on increasing profit margins through internal growth.