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Philip Morris Offering $11.8 Billion for Kraft : Bids $90 a Share for Major Food Company; Merger Would Be 2nd Largest in U.S. History

October 18, 1988|JONATHAN PETERSON and NANCY RIVERA BROOKS | Times Staff Writers

Philip Morris Cos., the tobacco and consumer products giant, announced on Monday an $11.8-billion cash bid to take over Kraft Inc., the cheese and ice cream maker, in what would be the second largest merger in U.S. history.

If approved, the deal would bring together a grocery basket full of household brand names, including Kraft's lineup of dairy products and Philip Morris' Maxwell House, Sanka, Oscar Mayer, Post cereals, Jell-O desserts, Miller beer and more.

Philip Morris executives informed Kraft Chairman John M. Richman of the unsolicited $90-a-share offer Monday afternoon and announced it publicly after the conclusion of stock trading.

In a letter to Richman, Philip Morris Chairman Hamish Maxwell said, "Kraft's food business complements our food business . . . . Kraft possesses excellent trademarks and competes in segments of the food industry in which we are currently not represented."

The proposal--the latest in a flurry of huge merger attempts this year--was seen as the latest effort by Philip Morris to diversify beyond tobacco. The firm took a major leap away from cigarettes in late 1985, when it purchased General Foods for $5.6 billion.

Philip Morris and other cigarette companies have been trying to cut back their financial dependence on tobacco, as sales have dropped amid growing social disapproval of smoking.

For example, R. J. Reynolds Tobacco Co. became RJR Nabisco in 1985 with the purchase of Nabisco Brands. The maker of Winston, Salem and Camel owns Del Monte Foods also, and tobacco accounts for just 40% of its sales.

Recently, Batus--the U.S. arm of London-based B.A.T. Industries, the world's largest tobacco company--waged a protracted $5.2-billion takeover fight for Los Angeles-based Farmers Group, an insurance holding company.

Philip Morris, based in New York, had 1987 sales of $27.7 billion. Despite its huge investment in food products, its principal income continues to come from tobacco, through the Marlboro, Benson & Hedges, Virginia Slims and Merit cigarette brands.

Kraft, headquartered in Glenview, Ill., had 1987 sales of $9.9 billion. It produces processed cheeses and salad dressings, frozen foods and a wide variety of other products, marketed under its own brand name as well as such labels as Breakstone, Light n' Lively, Sealtest, Breyers and Parkay.

Both Stocks Up

In trading Monday on the New York Stock Exchange, Kraft closed at $60.125, up 62.5 cents, far below the $90 a share offer. Trading in Philip Morris closed at $100 a share, up $1.375.

Currently, tobacco generates more than half of Philip Morris' sales. But George L. Knox, a Philip Morris spokesman, suggested the move was more than a diversification effort. "It is not necessarily a move away from tobacco but toward other things," he said. "To the extent that it makes us a broader, stronger company, that's fine."

"I think it's a good move to diversify away from the domestic tobacco industry," said Lloyd C. Rixe, who follows Philip Morris for the D.A. Davidson brokerage firm in Great Falls, Mont. "I'm not surprised that they're looking at another food company."

Sold Battery Operation

Kraft, which recently sold its Duracell battery operation and became an "all food" company for the first time in 30 years, was initially cool to the offer.

Kraft Chairman Richman said in a statement that the company's board of directors had previously determined that it was in the "best long-term interest of our shareholders" for Kraft to remain independent.

"They've thrown down the gauntlet here," said John Bierbusse, an analyst at A. G. Edwards & Sons in St. Louis. "Now we'll see what Kraft can do."

Although Bierbusse called the proposal "reasonable," he added that Philip Morris might need to raise its price to succeed. Bierbusse said a higher offer could emerge from another bidder.

Philip Morris' offer "may be low . . . " Bierbusse said. "I think this is a very reasonable bid, but it may not ultimately carry the day. Kraft is a formidable company."

Suit Against 'Poison Pill'

Philip Morris said it had also filed suit in federal court in Chicago seeking to force Kraft to revoke a "poison pill" defense against takeovers. Kraft's "poison pill" gives shareholders the right to buy additional shares in the event of a hostile takeover attempt. Such a provision is intended to make a hostile takeover much more costly.

Wall Street had been speculating that Philip Morris might be lining up a major acquisition because of projections that the company would roll up an average of $2 billion a year in excess cash flow over the next three to five years.

Kraft is the second food giant to be stalked by conglomerates this month. On. Oct. 4, Grand Metropolitan PLC--the world's largest producer of wine and spirits--offered $5.3 billion for Pillsbury Co. of Minneapolis. Pillsbury so far has resisted the takeover with a barrage of lawsuits.

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