The combination of Philip Morris Cos. Inc. and Kraft Inc. is likely to heighten competition in the increasingly global food products market and could prompt more mergers, industry analysts say.
"This could push companies like Nestle SA and Unilever NV to become more aggressive in making acquisitions of U.S. food companies with healthy overseas operations," said food analyst William Maguire of Merrill Lynch.Kraft on Sunday agreed to drop its own recapitalization plan and accept the tobacco conglomerate's sweetened $13.1 billion bid.
The merger deal, the second-largest after Chevron Corp.'s $13.3 billion purchase of Gulf Oil Co., will make Philip Morris the world's largest consumer products concern with sales of around $38 billion. Anglo-Dutch Unilever, with sales of around $31 billion, will fall to second place.
However, the concentration of key brands that will transform Philip Morris into a global powerhouse raised concerns on Capitol Hill, which is looking at the antitrust implications.
Sen. Howard Metzenbaum, D-Ohio, said the Federal Trade Commission should investigate the deal, which "raises extremely serious questions about the possible harmful effect on consumers." In a letter to FTC Chairman Daniel Oliver, Metzenbaum, the chairman of the antitrust, monopolies and business rights subcommittee, said the FTC "should examine very carefully how such a merger could affect competition in the production and sale of prepared food products."
Philip Morris has said all along that its products do not compete directly against Kraft's food lines.
One of its primary considerations in launching the bid for Kraft was to tap its strength in overseas markets. About a fourth of Kraft's annual sales of $9.9 billion are generated abroad.
Its globally recognized brands include Philadelphia cream cheese, Cheez-Whiz and Velveeta cheese. Kraft, which is based in Glenview, Ill., also has a distribution system that Philip Morris could use to launch its own products abroad. Philip Morris' General Foods unit produces Oscar Mayer meats, Jell-O puddings, Maxwell House coffee and the Post cereals.
"As we have stated from the outset, we believe the combination of Philip Morris and Kraft will create a U.S.-based food company that will compete more effectively in world food markets," Philip Morris Chairman Hamish Maxwell said in the statement announcing the friendly deal.
In particular, the acquisition of Kraft should help Philip Morris deal with the European Community's proposal to create a single European market by 1992 with no internal trade barriers. It also should help Philip Morris compete in Japan and other Far Eastern countries where U.S. food products could become extremely competitive.
In the more immediate future, analysts said, Philip Morris' transformation into the No. 1 food products company with many well-known brands under its hat will create fierce competition for limited supermarket shelf space.
Although consumer loyalty to rival brands should continue, Philip Morris' competitors will find their market share slipping.
Unilever or Nestle "could be fat and happy in a No. 2 position, or (they) could go after something new through an acquisition," said Janet Mangano, an analyst with Josepthal and Co. Possible U.S. takeover targets include Quaker Oats Co., Sara Lee Corp. and Borden Inc., analysts said.
Certainly Unilever and Nestle have not been inactive. Unilever Monday announced plans to buy U.S.-based Durkee Industrial Foods Corp. from Britain's Hanson Plc for $185 million, while Nestle recently concluded its purchase of Britain's Rowntree Plc for $4.5 billion.
Shareholders in Kraft and Philip Morris, reacting for the first time to the merger agreement, boosted Kraft's stock $7 to $103.50, nearly double what it was worth prior to the bid.
Philip Morris was off 62.5 cents at $95.375 Monday - it has lost about $5 on expectations that the acquisition will dilute its earnings.
The company, however, insists the move will be beneficial in the long run and that it fulfills its objective of reducing reliance on tobacco earnings.
The tender offer for Kraft expires Nov. 15 and is subject to certain conditions, including the expiration of the waiting period under the antitrust improvements act of 1976.