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Kraft Rejects Philip Morris Bid, Proposes Recapitalization

October 24, 1988

GLENVIEW, Ill. (AP) _ Kraft Inc. directors Sunday rejected an $11 billion takeover bid by Philip Morris Cos. Inc. and announced a $13.59 billion recapitalization plan intended to increase the value of its stock.

John M. Richman, chairman and chief executive of Kraft, said in a statement the plan should boost the total value of the company’s stock to $110 per share.

Philip Morris offered a week ago to buy Kraft for $90 a share in cash.

″We should take action to maximize shareholder value rather than accept an inadequate offer,″ Richman said. ″We strongly believe the $90 takeover bid ... undervalues Kraft.″

The recapitalization would include a distribution in cash and securities of about $98 per share and retention of common stock interest. Richman said the market would determine the value of Kraft stock after the distribution.

Kraft has nearly 123.6 million shares outstanding. A recapitalization at $110 a share values the company at about $13.59 billion, while the Philip Morris bid is worth about $11 billion.

On Friday, Kraft stock closed at $92 a share in trading on the New York Stock Exchange.

Kraft issued its statement late Sunday from its headquarters in suburban Chicago. Philip Morris spokesman Tom Ricke, reached by telephone in New York, said he could not immediately comment on the move by Kraft.

However, it was expected that the tobacco and food products company would raise its bid if necessary. Some securities analysts said a bidding war could erupt for Kraft.

Richman said Kraft’s recapitalization plan would be presented to the company’s board of directors soon, and then would be submitted to stockholders at a special meeting.

He said the plan would involve selling some Kraft businesses, but that core brands representing about 80 percent of the company’s profits would be kept.

The plan also involves bank borrowings of more than $6.8 billion and the public sale of some $3 billion of debt. Kraft has already begun negotiations on some of the sales, and Goldman, Sachs and Co. has said it is confident it can place the debt, Kraft said.

While Richman said the company would proceed with the recapitalization plan, he left open the possibility that the board could accept another bid.

″If someone comes forward with a transaction that would be more desirable than the restructuring plan, we will negotiate and your board will give full consideration to such a transaction,″ Richman said.

A combination of Kraft and Philip Morris would create the world’s largest maker of consumer goods and would decrease Philip Morris’ heavy dependence on profitable but stagnating cigarette sales.

Philip Morris, best known for Marlboro, Virginia Slims, Benson & Hedges and Merit cigarettes, took over General Foods Corp., the maker of Jell-O, Maxwell House, Kool-Aid, Shake ’N Bake and Oscar Mayer, in 1985 for $5.7 billion.

The addition of Kraft would bring such names as Velveeta, Thousand Island dressings, Cheez Whiz, Breyer’s, Light ‘n’ Lively, Sealtest and Frusen Gladje to the Philip Morris lineup.

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