Another merger joins tobacco and edibles
Boston — Jell-O, Oscar Mayer, Sanka, Kool-Aid -- and cigarettes. In the biggest corporate merger outside the oil industry, Philip Morris is acquiring General Foods, the giant White Plains, N.Y., parent of dozens of common supermarket brands.
The tobacco company is tendering for General Foods stock at $120 a share, making the total cost of the acquisition $5.75 billion. The new entity would be the largest consumer products company in the United States.
This follows a pattern of mergers in the food and tobacco industries in recent months. Earlier this year, Nestl'e bought Carnation. In June R. J. Reynolds Industries bought Nabisco Brands for $4.9 billion.
Since then the prospect of Philip Morris moving in a similar direction has been widely discussed. There are two very important reasons.
First, tobacco companies in the United States can see the writing on the wall. Decades of anti-smoking campaigns and surgeons-general reports have had the effect of reducing the number of tobacco users and making those who do smoke virtual pariahs.
Second, there is a spate of product-liability lawsuits involving the health hazards of tobacco. Many of these suits are awaiting court action. In the past 30 years there have about 100 of these kinds of suits. Only one made it to court, and R. J. Reynolds prevailed that time.
But the current legal climate -- including the propensity of juries to side with plaintiffs in personal-injury cases -- makes many observers believe that eventually a case will go against the tobacco companies. This could set a precedent that could then snowball, eating into the finances of these companies.
``From an investment perspective,'' notes a recent report by the Value Line Investment Survey, ``the important point to keep in mind is that the very existence of these cases and the publicity they engender have cast a pall over the tobacco industry.''
So the tobacco companies -- which at this time are still incredibly profitable money machines -- are diversifying, in part because, says one brokerage analyst (who asked that his name be withheld), ``it's a non-growth industry.''
Still, both food and tobacco companies have benefited from currently low commodity prices and could do well under provisions of the Reagan administration. Many food processing companies, however, have spent record amounts on marketing as brand names have proliferated.
The route onto the grocery shelves is often easier via an established brand name than by producing a new consumer product and hoping it will gain consumer recognition. Philip Morris -- which already owns Seven-Up and Miller Brewing -- would add such established names as Jell-O and Sanka to its roster.
But ``the acquisition [of General Foods] doesn't make that much sense from an economic standpoint,'' says J. William Leach, who follows the food industry for Donaldson, Lufkin & Jenrette. He points out that General Foods is a very slow-growing company -- the kind that a money machine like Philip Morris normally would not be attracted to.
The Reynolds-Nabisco and the Philip Morris-General Foods combinations, Mr. Leach says, really ``have more to do with the buyers than the sellers,'' citing the worries about product liability and the shunning of tobacco by the public. Both tobacco companies needed large food companies to make a sizable change in their product mix.
Other food companies, ranging from General Mills to Pillsbury, are frequently mentioned as takeover possibilities, but Mr. Leach says he thinks this group has been ``run up on speculation, [and] the list of buyers has been depleted.''
For both investors and consumers attuned to ethical considerations, the tobacco-food mergers present a dilemma.
On the one hand, people with objections to tobacco may be reticent to patronize food brands that are controlled by a company involved in tobacco sales. On the other hand, diversification makes Philip Morris, Reynolds, and other such companies less tobacco-oriented than they have been, thus making it easier one day for a further deemphasis on tobacco.
Harvard University last week told the Boston Globe that it is reviewing its endowment's investment in tobacco stocks.
Amy L. Domini, co-author of ``Ethical Investing'' (Addison-Wesley Publishing Company, Reading Mass., 1984), says she still views Philip Morris and Reynolds as tobacco companies and consequently ``would stay away from them.''
``It's very clear they are trying to protect themselves,'' Ms. Domini says, and are ``are invading other industries'' to do so. At the same time, she notes, Philip Morris is making no less commitment to tobacco processing.