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Despite Turmoil, Grace’s Businesses Regain Momentum

April 21, 1995

The turmoil in W.R. Grace & Co.’s executive suite has grabbed headlines and dominated investor interest lately. But the still-unfolding corporate melodrama also has overshadowed some favorable developments for Grace and what one analyst calls a ``really good earnings story.″

Grace shares have jumped in recent weeks on investor speculation that the specialty-chemical and health-care concern’s difficulties make it a potential takeover target, or a candidate for a breakup. Those possibilities aside, the ``fundamental reason to like the stock is that they’re going to do 15 percent earnings growth in 1995 and 1996,″ says Kimberly Ritrievi, an analyst with Lehman Brothers Inc.

Each of the company’s six core businesses is showing improved earnings momentum. And despite the top-level upheavals _ which now include the death from cancer on Wednesday night of Chairman J. Peter Grace Jr. at age 81 _ Grace’s operating managers are considered solid and experienced enough to handle matters for a time without a leader.

Disclosures of the internal power plays at the Boca Raton, Fla., company are eye-catching, to be sure. In early March, directors forced out J.P. Bolduc as president and chief executive officer, after deciding there was reason to believe he had sexually harassed female employees. Mr. Bolduc, who succeeded his onetime mentor, Mr. Grace, as CEO in 1993, has repeatedly denied the allegations.

The ouster of Mr. Bolduc, who was credited with successfully re-aligning W.R. Grace, angered institutional holders. They forced Mr. Grace to formally agree early in April to step down by next month’s annual meeting, and they established guidelines that pushed many of his allies from the board. His death came less than two weeks after he delivered an emotional farewell speech to the board.

In his 47-year reign as Grace’s CEO, Mr. Grace transformed what had been a shipping and trading concern through a diversification drive that verged on the eccentric. He brought Grace into the chemical business, and later added healthcare operations. But he also bought coal-mining and petroleum operations, a cattle-breeding business, Mexican fast-food restaurants, a printing-products line, a fertilizer unit and other diverse businesses.

The disconnected jumble of acquisitions found few fans on Wall Street. W.R. Grace ``had a long history of undermanaging its assets,″ says Ms. Ritrievi. The company lacked focus, says Smith Barney Inc. analyst Jaine L. Mehring, and ``capital seemed to be allocated any which way″ among the competing units.

Although the process of dismantling the conglomerate was under way before Mr. Bolduc became CEO, he’s considered the architect of the streamlining. In all, Grace’s asset sales have totaled $2.1 billion since 1991, and receipts last year alone were $646 million.

While Mr. Bolduc’s departure concerned some investors, others contend that he had already made the contribution to Grace that he was best suited for _ focusing it through a series of divestitures. They say he may not have been the right person to manage the company’s next phase.

Mr. Bolduc, a former Booz Allen & Hamilton Inc. consultant who joined Grace in 1983, was the ``right guy for the restructuring,″ says chemical analyst Fred Siemer. To advance the reform process now, he contends, Grace needs a leader with chemical-industry operating skills.

In the past year, Grace began to lose its image as a chronic underperformer. While last year’s $5.09 billion in revenue was 25 percent below 1990′s level, the company’s operating profit was 40 percent higher.

``At this point, the company that’s left certainly is a group of pretty attractive businesses,″ says Ms. Ritrievi.

The focus of investor interest these days is Grace’s health-care business, now the company’s single biggest and most-profitable unit. The operations generated 37 percent of sales and 43 percent of the company’s operating profit last year, as the unit’s sales climbed 24 percent to $1.88 billion, and operating profit rose 28 percent to $249 million.

The centerpiece of the health-care operation is National Medical Care Inc., the nation’s biggest provider of kidney-dialysis services and products. Grace acquired it in stages in the late 1980s, and has invested heavily to expand the high-margin operation.

But the cash machine isn’t immune to problems. National Medical’s medical-products division repeatedly has drawn fire from the Food and Drug Administration for serious quality-control problems at its plants. The manufacturing problems that spurred the FDA to take a tough stance nearly two years ago appear to have largely been resolved at the unit’s domestic production facilities, but the FDA continues to find shortcomings at some overseas plants.

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