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Heinz to Spin Off Some Businesses

Food: Firm will own 75% of Del Monte, which will add tuna and pet brands in $1.8-billion stock deal.

June 14, 2002|From Times Wire Services

PITTSBURGH — H.J. Heinz Co. will unload such sagging brands as StarKist Tuna and 9Lives cat food in a $1.8-billion deal with Del MonteFoods Co. that gives Heinz shareholders a 75% stake in Del Monte, the companies said Thursday.

The stock deal, valued at $1.8 billion, allows Heinz to focus on its core ketchup and frozen food products while increasing Del Monte's presence on supermarket shelves.

San Francisco-based Del Monte also will get Heinz's Kibbles 'n Bits, College Inn broths and domestic baby food business in the deal that will more than double its sales to $3 million.

Del Monte, the largest U.S. distributor of canned fruits and vegetables, will keep its company name but run the newly acquired Heinz divisions out of Pittsburgh.

Some 5,000 Heinz employees, or about 11% of Heinz's global work force, will transfer to Del Monte. Fewer than 100 jobs will be eliminated, Heinz said.

The spinoff follows similar moves by consumer and food companies such as Procter & Gamble Co. and ConAgra Foods Inc. to dump under-performing assets.

Indeed, Wall Street had long expected the Heinz divestment, which the company disclosed as it reported an 18% increase in quarterly earnings that matched forecasts. Investors and analysts have pressed the company to improve earnings and crank up its stock price, which has lagged peers.

"It gets rid of some problems for Heinz, but at a real cost," said David Nelson, an analyst for Credit Suisse First Boston, noting the deal will cut Heinz's dividend and near-term earnings. "The deal emphasizes that Heinz hadn't done enough to stop canned pet food and canned tuna from going down."

Investors were skeptical as well. Heinz shares fell $2.05, or 4.9%, to $39.55 on the New York Stock Exchange.

There may be a silver lining, though. Several analysts said the deal might position Heinz for an eventual buyout by a bigger food company.

Heinz said the transaction was designed to make the company more flexible and profitable.

"Some companies go for volume; we are going for growth," Heinz spokeswoman Debbie Foster said.

For Del Monte, the deal is a gamble because it now will go against baby food giant Gerber Products Co. and stiff competition in the pet food market, analysts said.

Del Monte said it is planning to invest about $100 million of merger-related savings on advertising over three years in an attempt to breathe new life into the old Heinz brands.

"The question is, 'Do these businesses have underlying strength?' " Del Monte Chief Executive Richard Wolford told Reuters in an interview. "I think they do."

Shares of Del Monte--which targeted earnings growth of 9% to 11% a year--rose 90 cents, or 8.4%, to $11.65.

Del Monte is buying the Heinz assets by issuing 157 million new Del Monte shares to Heinz shareholders--worth $1.8 billion based on Del Monte's share price of $11.65. Heinz shareholders, who will get 0.45 Del Monte share for each Heinz share they own, will control 74.5% of the new Del Monte company.

Del Monte also will assume about $1.1 billion in debt in the deal.

Heinz said earnings in its fiscal fourth quarter rose 18% to $219.4 million, or 62 cents a share, as sales rose 4.8% to $2.57 billion, fueled by stronger sales from frozen food brands acquired this year.

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