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Philip Morris Confirms Kraft Unit Is for Sale : Consumer goods: The food service division is expected to fetch between $600 million and $800 million.

October 01, 1994|From Bloomberg Business News

NEW YORK — Philip Morris Cos., following through on its new leadership's promise to streamline, is in talks to sell its Kraft Food Service unit, the company confirmed Friday.

Responding to news reports, Philip Morris confirmed it is in talks with one party to sell the division. It declined to elaborate.

Analysts with knowledge of the talks said the sale price would be between $600 million and $800 million.

The food and tobacco firm's stock rose $1.125 a share to close at $61.125 on the New York Stock Exchange. Volume was 3.53 million shares, making it the eighth-most-active U.S. issue.

Two analysts said that in addition to those talks, Philip Morris is close to selling smaller food units, perhaps including smaller brands and frozen food operations, for $100 million to $200 million.

One analyst said the total divestitures by the end of October will reach $700 million to $1 billion.

The food service business, acquired when Philip Morris bought Kraft in 1989, was cobbled together from local acquisitions. It has about $4 billion in annual revenue and profit of about $60 million, analysts said.

The analysts said the buyer is likely to be an investment firm, not a food company. The food service unit is the second-largest in the fragmented industry, behind Sysco Corp., but it has a market share of less than 5%.

Gary Black, an analyst with Sanford C. Bernstein & Co., said Wall Street reacted positively to the news not so much because of the reported price, but because the sale would show that management is committed to higher returns.

The food service business probably has a margin of roughly 1.5%, analysts said, far lower than Philip Morris' food manufacturing or cigarette operations.

"It's really the indirect effect--it shows they're using cash wisely," said Black, whose company owns more than 10 million Philip Morris shares. "One of the risks to this company is always that it could take its cash flow and do something stupid with it."

Black said the company has also talked about putting Kraft's macaroni and cheese unit up for sale.

"My guess is, you'll see most of the cash flow (from the coming sales) redeployed in international confectionery, international drinks and maybe international bakery," he said.

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