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Quaker Oats to Repurchase Shares, Expand ESOP

May 8, 1989

CHICAGO (AP) _ Quaker Oats Co. said Monday it will repurchase up to 7 million shares of its outstanding common stock in a bid to increase the value of remaining shares.

The company said the repurchase of 2 million of those shares would be used to offset a new issue of up to $125 million of convertible preferred stock for the company’s employee stock ownership plan.

Quaker said in a news release that at least part of the share repurchase would be financed with an unspecified amount of borrowed money.

″We believe increased leverage will lower our cost of capital and create more value for our shareholders,″ said William D. Smithburg, chairman and chief executive officer. ″We feel comfortable increasing our debt over time, given the stong performance of our core businesses.″

The company’s stock price rose 12 1/2 cents to $56.62 1/2 a share Monday in New York Stock Exchange composite trading. Based on that price, the cost of Quaker’s share-repurchase plan could exceed $395 million.

The stock program will be accomplished through open-market purchases and privately negotiated transactions, the company said.

Quaker, an international processor and marketer of food, pet food and toys, had about 79.5 million common shares outstanding as of March 31.

Spokesman Ronald Bottrell said Quaker had about $424 million in long-term debt and $450 million in short-term debt at the end of March.

The additional borrowing for the stock buy-back will increase Quaker’s debt load to a little more than 50 percent of its total capitalization, up from the current 42 percent, Bottrell said.

Quaker, like many food, tobacco and beverage companies, is a ″cash cow,″ generating relatively large amounts of cash and having highly predictable earnings, said John Maxwell Jr, an analyst with Wheat First Securities Inc. in Richmond, Va.

″You can put more debt load on these companies than those in highly volatile situations,″ such as airline and high-technology firms, he said.

The greater debt load and the expanded employee stock ownership plan could make Quaker less attractive as a takeover target, analysts said. Takeover rumors sent Quaker’s stock price up sharply last August.

Quaker said it would complete a previously announced 2-million-share repurchase program, probably by the end of June, before beginning the new repurchase plan.

Quaker said it hopes to complete the new repurchase program by June 30, 1990, the end of its 1990 fiscal year.

In addition to its Quaker Oats products, Quaker owns the Gatorade and Aunt Jemima food brands and toymaker Fisher-Price.

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