Printer Friendly

USA food giants and '90s economics: expand, contract, or restructure.

USA Food Giants and '90s Economics: Expand, Contract or Restructure

Summertime, and the living is easy. Outdoor barbecue flames are jumping and picnics are high on the list of ways to beat the heat of kitchen cooking. Unfortunately, even with the advent of convenient, thermal-neutral microwave ovens, retail sales of many frozen food products have been taking a seasonal vacation of late.

But while freezer section movement may be relatively slow in supermarkets, there has been lots of fast action in the corporate board rooms of a number of America's leading food firms as companies expand, contract and realign themselves to build strength and cut losses.

On the expansion track is ConAgra, which has moved beyond the business of selling frozens, processed meats and commodities with its June agreement to purchase Beatrice from Kohlberg Kravis Roberts & Co. (KKR) for $1.34 billion in cash and stock. Indeed, it will put the nation's largest FF company (whose stable of brands includes Banquet, Armour Classics, Morton, Patio, Chun King, Healthy Choice, Kid Cuisine, Singleton, Taste O'Sea and Country Skillet) firmly in the shelf-stable grocery aisle.

Among the Beatrice labels picked up are Hunt's ketchup, Wesson cooking and salad oils, Peter Pan peanut butter, Snack Pack puddings and fruits, Reddi-Wip aerosol dessert topping and Orville Redenbacher's popcorn.

With annual sales of $15 billion, the Omaha, Nebraska-headquartered diversified food outfit's acquisition of Chicago-based Beatrice will add more than $4.3 billion in annual revenue to its ledger.

"This is clearly a major strategic opportunity," said Charles H. Harper, ConAgra chairman and chief executive officer. "Together we will be more able to compete with the international giants of the food industry."

The deal makes ConAgra the second biggest food processor in the USA next to Philip Morris. As a matter of fact, the friendly marriage with Beatrice catapults ConAgra into the ranks of the nation's top 20 corporate elite, along with such household names as Boeing and Procter & Gamble.

The Omaha company has come a long way from the days when Wall Street largely regarded it as just another producer of meat and poultry commodities. While it still markets plenty of both (sales of 1.3 billion pounds of chicken brought in $1.5 billion last year), there is no mistaking now that Harper has built a first-rate processed foods outfit.

The Beatrice divestiture adds up to a total return on investment of about 50% a year for KKR investors, who put up only $450 million in 1986 to engineer an $8.2 billion leveraged buyout of the company - a record at the time. After that KKR sold off pieces of the conglomerate, including the large public refrigerated warehouse operator now known as Americold. The sale was said to have netted KKR and its investors $848 million after paying off incurred debt. The Beatrice receipts will elevate the total return to $2.2 billion.

Meanwhile, ConAgra has not overburdened itself with debt in the transaction. Some $626 million (47%) of the purchase price will be paid in cash. Wall Street has looked favorably upon the deal.


On the other hand, one concern that has weighed itself down with financial burdens is thought to be RJR-Nabisco. Purchased by KKR last year for $25 billion, the tobacco-food goliath has slashed capital spending as it attempts to obtain $6.8 billion in new loans to pay off old ones.

Outlays of $119 million during the first five months of 1990 are reportedly 45% below the $219 million originally budgeted. And last year capital spending of $522 million was considerably less than the $868 million planned for upgrading plants and equipment.

The above figures were gleaned from bank documents the company prepared in the course of seeking new financing. RJR would not elaborate on the numbers for the press, although a spokesman said that the company stood by its projected $500 million in 1990 capital spending.

Critics of leveraged buyouts have pointed to the RJR situation as an example of what can happen when a company becomes too saddled with debt payments. Their argument is that proper investment in equipment, let alone research and development, is short-changed by large interest payments that must be made to banks to avoid default.

Spending cuts, of course boost cash flows in the short term. But in the long run profits could be negatively affected if competitors that invest in upgrading operations and merchandising campaigns gain ground in the marketplace.

"To keep their market position they must be competitive," stated Emanuel Goldman, a Paine Webber Inc. securities analyst who follows RJR and other food and tobacco outfits. "They could mess with the capital outlays for a year or two. But the question is: Can they turn it on and off that quickly?"

The answer is anybody's guess at the moment. "I don't know what the right amount is, but you can't play with it too long," said Goldman.

Sara Lee Closure

Elsewhere on the American food business front, Sara Lee Corporation has announced that it will shut down its flagship factory in Deerfield, Ill., eliminating 600 bakery division jobs in the process.

"Cheesecakes aren't selling as well as they used to because of fat-conscious consumers," summed up the Chicago Tribune, so the company opted for some "belt tightening of its own."

The 26-year-old Kitchens of Sara Lee plant is considered to be the birth place of the frozen baked goods industry. But over time the company's largest and first mass production bakery - which produces poundcake, Danish pastries, cinnamon rolls, croissants and muffins in addition to cheesecake - became outmoded.

"We explored every single alternative. It's an old plant not suited to today's needs. It would be prohibitively expensive to renovate it and get the production flexibility we have elsewhere," declared C. Steven McMillan, senior vice president of Sara Lee and chief executive of the bakery operation.

The company expects to cease operations completely in Deerfield by next March 1. Its production schedule will be shifted to other facilities. Sara Lee Bakery operates plants in Dubois, Ind.; New Hampton, Iowa; Kansas City, Kan.; Traverse City, Mich.; Forest, Miss.; Tarboro, N.C.; Greenville, S.C.; as well as in Canada, the United Kingdom and Australia.

While the company is busy streamlining production, it has not gone unnoticed that the $750 million bakery division has seen unit sales fall recently. Thomas MacLeod, former chief executive of the division, suddenly quit in April to take over a pet food company.

Although the division had been a star performer in 1988 and 1989, with a 30% share of the U.S. frozen baked goods market, its profits have been shrinking - apparently because it has been late in developing fat-free and low-cholesterol products.

MacLeod jumped ship to become president and CEO of Iams Co., Dayton, Ohio, which makes upscale pet foods. John McMillan, analyst for Prudential-Bache Securities, Inc., theorized that MacLeod may have been frustrated over trying to keep the momentum going at Sara Lee.

Campbell for Sale?

Rumors continue to circulate that Campbell Soup, which has already closed its flagship factory, will be sold. A dissident faction of the Dorance family that controls 17% of the Camden, N.J.-headquartered company's stock has formed a trust to make it easier to act together to put the food processor on the block. However, another family group, which holds more than 41% of the shares, is said to be in favor of keeping Campbell independent.

As Wall Street ponders, new CEO David W. Johnson has wasted no time in restructuring the company's top management. James Van Stone is now heading up frozen food operations in North America, having been named sector vice president-convenience meals. Reporting directly to Herbert M. Baum, division president, he will be responsible for Le Menu, Le Menu LightStyle, Swanson, Great Starts and Mrs. Paul's brands.

The shakeup left Steven A. McNeil without a job. Resigning in April, his former posts were corporate vice president, group general manager of convenience meals and president of Mrs. Paul's Kitchens.

Pepperidge Farm, Inc. will continue to operate under the stewardship of Richard Shea, president, who will report directly to CEO Johnson. A. Jack Dale, president of Campbell Sales Co., also remains in place.

Third quarter earnings under the leadership of former CEO R. Gordon McGovern were reported to have risen more than 25% to $54.6 million compared to $43.5 million during the same period in 1989. But analysts were unimpressed, feeling the gain was not so much a profit surge but rather a return to the performance level of two years ago. Sales advanced 4.5% to $1.52 billion.

Campbell USA sales were reported as strong. Mrs. Paul's seafood logged earnings of $91.3 million on sales of $881 million, a 10% uptick.

Non-operating gains and favorable currency translation in Argentina made for a solid international advance too, as the foreign division's profits rose 45% to $16.7 million.

However, losses posted by European units continue to pain analysts, who estimate that red ink in Britain alone accounts for five cents a share.

In a prepared text, CEO Johnson said only that "United Kingdom frozen and European biscuit operations continued to have earnings difficulties."

Meanwhile, the world is waiting to see which companies Campbell will sell off in Europe to lighten its load.
COPYRIGHT 1990 E.W. Williams Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:United States frozen food industry
Publication:Quick Frozen Foods International
Date:Jul 1, 1990
Previous Article:Skaarfish: 'big fish' of frozen salmon emphasizes custom processing expertise.
Next Article:Food Systems York out to be major player in global industrial refrigeration market.

Related Articles
Say hello to the 'nourishing nineties,' a time when thought for food is 'healthy.' (News from the United Kingdom)
Heinz acquires JL Foods in $500 million cash deal.
Frozens, now a puny player in vending, will grow to $221M business, says study.
Thirty-five years of QFFI, setting the pace for industry.
Aviko plants flag in United States market as factory rises on North Dakota plains.
Frozen Foods, Potato & Seafood Sales Figure Prominently in ConAgra Growth.
The Sun Never Sets on Heinz Empire; Frozen Food a Jewel in the Crown.
Red Meat Back in Vogue in Canada, Beefing up Presence In Frozen Sector.
Jeff DeLapp heads Lamb-Weston US; Bobby Horowitz focuses on Europe. (Potato Trends Watch).
French Canadian processor uses stunt to stir up sales.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters