Philip Morris to buy Nabisco

$14.9 billion deal uniting snack giant with Kraft Foods

Brand-name combine

R.J. Reynolds taking over Nabisco parent, tobacco liability


In a transaction that will create the world's most profitable food company, Philip Morris, the parent of Kraft Foods, announced yesterday that it would buy Nabisco Holdings, the food company that makes and markets Oreo cookies, Ritz Crackers, and other classic packaged foods, for $14.9 billion.

In addition, Nabisco Group Holdings, the parent of Nabisco Holdings, said that once it completes the sale of its food business to Philip Morris, it has agreed to be acquired by the R. J. Reynolds Tobacco Co. for $9.8 billion. Nabisco spun off R. J. Reynolds, the tobacco company, and other assets about a year ago. The pending deal means R. J. Reynolds will assume any liability from tobacco lawsuits that Nabisco Group might have had.

The two sales culminate a long-running effort by Carl C. Icahn, Nabisco's biggest shareholder, to boost the value of his investment. The deal continues the wave of consolidation that has been sweeping through the $450 billion food industry.

Geoffrey C. Bible, chairman and chief executive of Philip Morris, maintained that the new food company will benefit consumers and store owners alike.

"Scale gives you great capability," Bible said in an interview yesterday. "It allows you to be more efficient with retailers and provides a greater capability to bring new products to market. The bigger you are, the better you are at delivering what the customer and the consumer wants."

Philip Morris said it expected the acquisition of Nabisco Holdings to add to its earnings by 2002. The company, which will have 117,000 employees in its food operations once the transaction is completed, said it plans to save more than $400 million in 2002 and about $600 million by 2003, although it declined to say how it would achieve those savings. Despite the scope of a combination that will unite Nabisco with Kraft Foods, Philip Morris' food subsidiary, analysts said there was little likelihood that the deal would create much of a stir with federal regulators because the food industry remains relatively fragmented.

The new company, which will keep the name Kraft Foods, will be a giant. Added together, Kraft and Nabisco had revenue in 1999 of $34.9 billion, and operating profits of $5.5 billion.

In terms of revenue and operating profits, "the combined food company is bigger than H. J. Heinz, Campbell Soup, Quaker Oats, Hershey Foods and Kellogg put together," said John O'Neil, a food industry analyst at Paine Webber.

The deal will bring an astonishing array of well-known brands under one roof. Kraft's products include General Foods and Maxwell House coffees, Post Cereals, Philadelphia Cream Cheese, Jell-O, Kool Aid and Tang.

In addition to Oreo and Ritz Crackers, Nabisco makes a broad array of other snack foods, including Chips Ahoy! Cookies, Planters Nuts and Life Savers candy.

Wall Street analysts had been predicting that, because of its size, Philip Morris would be the likely winner in what was a tightly controlled auction of Nabisco. While the names of many other potential bidders surfaced while Nabisco's food business was on the block, only one other group, a consortium of Danone SA and Cadbury Schweppes PLC, actually submitted an offer.

"It builds a powerful domestic company," said John McMillin, an analyst at Prudential Securities.

"There is not a tremendous product overlap," between the two companies, he said. "Nabisco gives Kraft a better growth profile than they had previously. This is the strategy that makes the most sense."

Burt Flickerin III, a managing director of Reach Marketing, a retail consulting firm based in Westport, Conn., called the purchase by Philip Morris "a superb strategic acquisition."

"Kraft's biggest issue is having too many products that are in categories, like cheese, with declining consumption," he said. "Nabisco is in one of the few fast-growing, expandable areas: cookies, crackers and salted snacks."

But analysts were surprised by another move Philip Morris announced yesterday.

Once the purchase of Nabisco has been completed, Philip Morris said it plans to sell part of its Kraft Foods business to the public.

The company said an initial public offering is likely early next year.

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