Business: Philip Morris acquires Nabisco

Philip Morris acquires Nabisco

The $18.9-billion deal will combine such dominant brands as Oreo cookies and Ritz crackers with Kraft, Jell-O and Maxwell House.

©Washington Post

The nation's largest cigarette maker, Philip Morris Cos., Sunday agreed to acquire Nabisco Holdings Corp. for $18.9-billion and plans to combine it with its Kraft Foods to create a huge and profitable food company to help offset its tobacco liabilities.

The deal underscores two major trends in the world of consumer products companies: the increasing size of food companies seeking to improve their leverage against large, powerful grocery sellers, such as Wal-Mart Stores and Royal Ahold NV; and tobacco companies looking for ways to unlock the value of other holdings that have been depressed by uncertainties stemming from tobacco litigation.

The merger creates a gigantic food company that combines such dominant brands as Oreo cookies, Ritz crackers, Planters nuts and Life Savers candies with the Philip Morris brands of Kraft, Jell-O, Maxwell House and Oscar Mayer. More than 90 percent of Nabisco's U.S. brands are leaders in their respective categories, the company said.

Based on 1999 financial figures, the combined Philip Morris and Nabisco companies would have had revenue of $86.6-billion and operating income of $16.3-billion. Kraft and Nabisco would have had combined revenue of $34.9-billion and operating income of $5.5-billion in 1999.

The acquisition makes Nabisco, which once was part of the large tobacco company RJR Nabisco Holdings Corp., again part of a large tobacco company, at least for now. Analysts said they expect Nabisco might someday be spun off again.

Last year RJR Nabisco Holdings Corp. created Nabisco Group Holdings when it split up its food and tobacco units. RJR sold its international tobacco business and spun off its domestic tobacco company as R.J. Reynolds Tobacco Holdings.

Two deals were announced Sunday. In the first deal, Philip Morris bought Nabisco Holdings Corp., the food business. In the other deal, R.J. Reynolds Tobacco, which once was part of RJR Nabisco Holdings, bought Nabisco Group Holdings -- the corporate shell that will be left when the food business changes hands.

Nabisco Group Holdings' single asset would be about $11.8-billion in cash that would remain after the sale of the food business. After paying $9.8-billion to acquire Nabisco Group Holdings, R.J. Reynolds would realize net proceeds of about $1.5-billion.

"So RJR has bought its former parent and benefited to the tune of about $1.5-billion," said Martin Feldman, a tobacco industry analyst with Salomon Smith Barney. Feldman said RJR was the only realistic buyer for the company since it, in addition to the cash, has potential risk from massive litigation against the nation's five biggest cigarette companies. The five companies have agreed to pay $254-billion to settle lawsuits brought by the states but continue to face additional claims.

"RJR is the only company that could buy Nabisco Group Holdings without in any sense increasing its own tobacco litigation exposure," Feldman said.

Ann H. Gurkin, a tobacco industry analyst at the brokerage firm Davenport & Co., said she likes the transaction because it indicates Philip Morris "is focused on its entire business portfolio." Gurkin and Feldman both said they expected that Philip Morris might someday spin off its food business, as RJR did, although Philip Morris Chairman Geoffrey C. Bible has said he does not plan to do so.

In announcing the combination of Nabisco and Kraft Sunday, Bible said Philip Morris will sell up to 19.99 percent of the new company in a public stock offering, using the proceeds to help pay down the debt incurred in the acquisition. "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," Bible said in a statement.

Sunday's deal, which still needs shareholder and regulatory approval, is expected to produce annual savings for the combined food company of more than $400-million in two years and about $600-million by 2003. The companies said they expected the deal to be completed by October 2000.

The acquisition writes the latest chapter in the high-profile history of R.J. Reynolds over the past two decades as it struggled to overcome the burden that tobacco had become to its corporate value. The company began diversifying out of the tobacco sector in the 1960s and 1970s. In 1979, R.J. Reynolds bought Del Monte Foods for $618-million and in 1985, it acquired Nabisco Brands for $4.9-billion.

Then, in the late 1980s, RJR Nabisco chief executive F. Ross Johnson attempted a leveraged buyout of his company, but was outbid by leveraged buyout specialists Kohlberg Kravis Roberts & Co. in a corporate brawl that was chronicled in the best-selling book, Barbarians at the Gate.

The company was taken private, and then taken public again in 1991, and since then has been pursued by investors, including Carl Icahn who forced the company's board to consider restructuring. As recently as last week Icahn had increased his bid to $31 a share. Sunday's deal was for $55 a share and included the assumption of approximately $4-billion in debt. Nabisco's stock, which had been trading at less than $35 a share until April, closed Friday at $51.621/2, up about 6 cents a share.

Icahn, who started buying the company's stock when it was trading at less than $15 a share, holds nearly 10 percent of Nabisco Group Holdings. Other bidders who lost out include a team of Groupe Danone SA and Cadbury Schweppes PLC who had also sought the food assets.