Philip Morris Offering $11.8 Billion for Kraft : Bids $90 a Share for Major Food Company; Merger Would Be 2nd Largest in U.S. History

Philip Morris Cos., the tobacco and consumer products giant, announced on Monday an $11.8-billion cash bid to take over Kraft Inc., the cheese and ice cream maker, in what would be the second largest merger in U.S. history.

If approved, the deal would bring together a grocery basket full of household brand names, including Kraft’s lineup of dairy products and Philip Morris’ Maxwell House, Sanka, Oscar Mayer, Post cereals, Jell-O desserts, Miller beer and more.

Philip Morris executives informed Kraft Chairman John M. Richman of the unsolicited $90-a-share offer Monday afternoon and announced it publicly after the conclusion of stock trading.

In a letter to Richman, Philip Morris Chairman Hamish Maxwell said, “Kraft’s food business complements our food business . . . . Kraft possesses excellent trademarks and competes in segments of the food industry in which we are currently not represented.”

The proposal--the latest in a flurry of huge merger attempts this year--was seen as the latest effort by Philip Morris to diversify beyond tobacco. The firm took a major leap away from cigarettes in late 1985, when it purchased General Foods for $5.6 billion.

Philip Morris and other cigarette companies have been trying to cut back their financial dependence on tobacco, as sales have dropped amid growing social disapproval of smoking.

For example, R. J. Reynolds Tobacco Co. became RJR Nabisco in 1985 with the purchase of Nabisco Brands. The maker of Winston, Salem and Camel owns Del Monte Foods also, and tobacco accounts for just 40% of its sales.

Recently, Batus--the U.S. arm of London-based B.A.T. Industries, the world’s largest tobacco company--waged a protracted $5.2-billion takeover fight for Los Angeles-based Farmers Group, an insurance holding company.

Philip Morris, based in New York, had 1987 sales of $27.7 billion. Despite its huge investment in food products, its principal income continues to come from tobacco, through the Marlboro, Benson & Hedges, Virginia Slims and Merit cigarette brands.

Kraft, headquartered in Glenview, Ill., had 1987 sales of $9.9 billion. It produces processed cheeses and salad dressings, frozen foods and a wide variety of other products, marketed under its own brand name as well as such labels as Breakstone, Light n’ Lively, Sealtest, Breyers and Parkay.

Both Stocks Up

In trading Monday on the New York Stock Exchange, Kraft closed at $60.125, up 62.5 cents, far below the $90 a share offer. Trading in Philip Morris closed at $100 a share, up $1.375.

Currently, tobacco generates more than half of Philip Morris’ sales. But George L. Knox, a Philip Morris spokesman, suggested the move was more than a diversification effort. “It is not necessarily a move away from tobacco but toward other things,” he said. “To the extent that it makes us a broader, stronger company, that’s fine.”

“I think it’s a good move to diversify away from the domestic tobacco industry,” said Lloyd C. Rixe, who follows Philip Morris for the D.A. Davidson brokerage firm in Great Falls, Mont. “I’m not surprised that they’re looking at another food company.”

Sold Battery Operation

Kraft, which recently sold its Duracell battery operation and became an “all food” company for the first time in 30 years, was initially cool to the offer.

Kraft Chairman Richman said in a statement that the company’s board of directors had previously determined that it was in the “best long-term interest of our shareholders” for Kraft to remain independent.

“They’ve thrown down the gauntlet here,” said John Bierbusse, an analyst at A. G. Edwards & Sons in St. Louis. “Now we’ll see what Kraft can do.”

Although Bierbusse called the proposal “reasonable,” he added that Philip Morris might need to raise its price to succeed. Bierbusse said a higher offer could emerge from another bidder.

Philip Morris’ offer “may be low . . . “ Bierbusse said. “I think this is a very reasonable bid, but it may not ultimately carry the day. Kraft is a formidable company.”

Suit Against ‘Poison Pill’

Philip Morris said it had also filed suit in federal court in Chicago seeking to force Kraft to revoke a “poison pill” defense against takeovers. Kraft’s “poison pill” gives shareholders the right to buy additional shares in the event of a hostile takeover attempt. Such a provision is intended to make a hostile takeover much more costly.

Wall Street had been speculating that Philip Morris might be lining up a major acquisition because of projections that the company would roll up an average of $2 billion a year in excess cash flow over the next three to five years.

Kraft is the second food giant to be stalked by conglomerates this month. On. Oct. 4, Grand Metropolitan PLC--the world’s largest producer of wine and spirits--offered $5.3 billion for Pillsbury Co. of Minneapolis. Pillsbury so far has resisted the takeover with a barrage of lawsuits.

Chevron in Biggest Merger

The proposed Philip Morris-Kraft merger would be second only to Chevron Corp.’s $13.3-billion acquisition of Gulf Oil Corp. in 1984.

Monday’s announcement continues a wave of huge mergers that has been taking place at a record pace this year. In the first half of 1988, 195 deals exceeded $100 million and 30 deals exceeded $1 billion, according to W. T. Grimm & Co., a Chicago firm that monitors merger activity.

In California, Philip Morris owns Mission Viejo Co., the large real estate developer, as well as a Miller Brands distribution firm in Montebello and a Louis Rich turkey-processing factory in Modesto. Kraft’s California holdings include All American Gourmet Co. of Orange, which manufactures frozen foods, and Santa Ana-based Keeler Foods, a wholesale food distributor.

In his letter to Richman, Philip Morris Chairman Maxwell said: “This transaction will create a U.S.-based company with a larger portfolio of leading trademarks and broad distribution and manufacturing capabilities which can more effectively compete in world food markets.

Suitor Praises Kraft

“We respect and admire your organization, product line and commitment to quality. It is our intention that Kraft will continue to be managed by Kraft executives and that it will retain its current headquarters location.”

The offer formally takes effect today and is to expire at midnight on Nov. 15.

In his initial response, Richmond said the Kraft board would meet in “due course” to consider the offer.

“Kraft has been engaged in a program designed to maximize the long-term value of its shareholders’ investment in Kraft,” Richmond said in a statement. “Our board of directors has previously concluded that the best long-term interest of our shareholders is that Kraft continue to operate as an independent company.”

To Make Recommendation

Kraft executives asked shareholders to hold off responding to Philip Morris until Kraft offered them an official recommendation by Oct. 31.

Philip Morris executives said Monday that they would seek to keep Kraft if they took it over, rather than sell off units.

“Our current plan would be for it to be managed by its own executives, maintain its current headquarters and essentially be a free-standing unit,” Knox said.