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Philip Morris’s Problem: Cash Is Burning Hole In Its Pocket

October 19, 1988

NEW YORK (AP) _ Cash is burning a hole in the pocket of Philip Morris Companies Inc., the cigarette, food and brewing giant that began an $11 billion cash tender offer for Kraft Inc. on Tuesday.

Philip Morris is hoping its acquisition of Kraft will solve two problems: finding a place for excess cash and readying the company for the international food wars of the 1990s.

The offer, announced late Monday, formally began on Tuesday, and Wall Street took a cautious view.

Kraft’s stock shot up $28.12 1/2 a share to $88.25, just under the $90-a- share offer. But Philip Morris stock fell $4.50 a share to $95.50, reflecting investors’ worries that the expense of the acquisition would hurt the company’s profits. Trading was extremely heavy in both stocks.

Meanwhile, Moody’s Investors Service Inc. said it was re-examining the credit ratings of both companies and might downgrade them.

The immense profitability of cigarettes is what gives Philip Morris the muscle to try to buy Kraft, a deal that would give the company more control of supermarket shelf space and an entree to the important European market.

The purchase becomes especially important in light of the recent $5.23 billion bid by Britain’s Grand Metropolitan PLC for Pillsbury Co. Pillsbury’s directors urged stockholders to reject the offer Tuesday.

In another deal, Holly Farms Inc. on Tuesday rejected an $891 million purchase offer from Tyson Foods Inc. that would have united two of the nation’s largest poultry processors.

If successful, the bids would accelerate a trend in which the food business is being concentrated in the hands of a few giant multinational companies.

If Philip Morris succeeds in acquiring Kraft, it will mean that someone could puff on a Marlboro, sip a glass of Miller Lite or Kool-Aid and munch on Velveeta or Jell-O without ever buying a product not made by Philip Morris.

Philip Morris contends the purchase of Kraft would not raise antitrust concerns because Kraft and Philip Morris’ General Foods Corp. make different kinds of food.

Analysts said the two companies combined would be able to make more effective use of techniques such as cooperative advertising with supermarkets in order to increase their all-important share of shelf space.

Kraft and General Foods also could share trucks, warehouses and sales representatives. Meanwhile, Kraft’s presence overseas could provide a wedge for getting General Foods brands distributed abroad.

″These American companies have got to get bigger and strong before the other guys do, so they can compete head to head with the European conglomerates,″ said Mary English, an analyst for the Furman Selz investment firm.

Contrary to the impression given by the backlash against smoking in the United States, tobacco is not a dying industry. American companies are selling cigarettes effectively abroad, and the global industry is growing 1.5 percent to 2 percent a year, Miss English said.

But the impression that tobacco is a languishing market has kept Philip Morris’s stock lower than it otherwise might be, Hamish Maxwell, Philip Morris’s chairman and chief executive, said in an interview Monday night.

Philip Morris gets 52 percent of its revenue, and a whopping 77 percent of its operating profit, from its tobacco business. If the Kraft deal went through, 40 percent of revenue and 65 percent of operating income would come from tobacco, Miss English said.

Philip Morris expects to generate $11 billion to $12 billion in excess cash over the next five years, which would be used to pay for the deal.

In a sign of its financial strength, the company said Tuesday it intended to pay for the deal up front by borrowing entirely from commercial banks, rather than by selling debt securities to the public.

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