Philip Morris Inhales Nabisco [Fool Plate Special] June 26, 2000

An Investment Opinion

Philip Morris Inhales Nabisco

By LouAnn Lofton (TMF Lou2)
June 26, 2000

Summary: Tobacco king Philip Morris succeeds in its quest to buy Nabisco Holdings. After combing Nabisco with its Kraft Foods subsidiary, an initial public offering of the new food unit is planned. Investors hesitant to buy Philip Morris because of its tobacco sales will now have a shot at just owning the food unit.

It's an Oreos and Kool-Aid kind of day for Philip Morris (NYSE: MO) shareholders. The world's largest tobacco company will soon have more foodstuffs under its roof with the purchase of the #1 cookie and cracker maker in the U.S. In a deal announced yesterday, Philip Morris will buy Nabisco Holdings (NYSE: NA) for $14.9 billion. Philip Morris will take on about $4 billion in debt from Nabisco.

Philip Morris will get all of Nabisco Holdings' shares outstanding for $55 a share. The parent company for Nabisco Holdings, Nabisco Group Holdings (NYSE: NGH), which owns 80.6% of Nabisco Holdings, will also be sold. After the completion of the sale of Nabisco Holdings to Philip Morris, R.J. Reynolds Tobacco (NYSE: RJR) will acquire all of the outstanding shares of Nabisco Group Holdings for $30 a share. The main asset that R.J. Reynolds will get out of that sale is a chunk of cash leftover from the Philip Morris sale.

R.J. Reynolds was spun off from Nabisco Group Holdings last year in an effort to distance the tobacco operations part of the company from the food operations part, so that particular union is actually a reunion.

Philip Morris plans to combine Nabisco with its Kraft foods unit. Kraft already is North America's #1 food business, so the addition of Nabisco and its products and brands to the line-up will only add to that dominance. Buying Nabisco also ensures that Philip Morris remains the world's second largest food company after the Swiss giant Nestle.

As tobacco sales for Philip Morris continue to create the possibility of more litigation and liability, it makes sense that the company would focus on being an even bigger player in the food market. Nabisco brings with it 18 top brands to complement the existing 55 brands that each generate more than $100 million in revenue for Philip Morris. With this transaction, Kraft will become the world's most profitable food company.

Philip Morris also announced that after the combination of Nabisco with Kraft, the company plans to sell less than 20% of the company to the public by way of an initial public offering (IPO). The expected IPO should happen by early 2001.

For those who have wanted to invest in the food dominance of Philip Morris without the liability of the tobacco operations, this should be welcome news. Essentially, the new IPO will serve as a tracking stock for the food operations of the company. It seems almost too good to be true. Investors will be able to get all the greatness of the food brands that have been contributing to Philip Morris's bottom line for years, plus the addition of even more solid brands from Nabisco, all without having to deal with the legal uncertainties that selling cigarettes brings with it.

Current Phillip Morris shareholders will probably want to consider their options carefully once the new company is partially spun off. Certainly, they will still benefit, since Phillip Morris plans to only sell less than 20% of the combined Kraft and Nabisco unit, but a purchase of Kraft stock may end up being a better performer over the long term since it will be set free from the shackles of tobacco. Either way, Philip Morris shareholders should be encouraged by the acquisition as it only strengthens an already strong part of the company.

Your Turn:
Vote in the following poll and let your opinion be heard:

Which company would you rather own, given the choice?

  1. Philip Morris-- I want the whole shebang.
  2. Kraft Foods -- I'll just take the food, thanks.
  3. Neither!
Suggested Links:
  • Philip Morris Discussion Board
  • Nabisco Group Holdings Discussion Board
  • Philip Morris to Snap Up Nabisco? 6/22/00
  • Bidding for America's Cookie Jar, 5/15/200