Goodbye, Elsie?

Dairy Foods,  Nov, 1994  by Gail Doeff

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As KKR nears acquisition of Borden, the future of the once vibrant dairy unit looks bleak

After decades of loyal service as the mascot of Borden Inc., Elsie the cow may soon be heading out to pasture. As the industry recovers from its initial shock over Kohlberg Kravis Roberts' $2-billion bid to acquire Borden, speculation about the future of the company's dairy business is rife. Borden, Columbus, Ohio, declined to comment on the issue, but analysts that follow the hamstrung giant are not so shy. Nearly all predictions point to the dairy unit's sale.

"All the king's horses and all the king's men can't put Borden's dairy business back together again," says John McMillin, a Prudential Securities analyst who follows the company. "KKR sees an enormous amount of effort and maybe a low probability for success," in keeping the operations. The difficulty may lie in finding a buyer, says Argus Research analyst Terry Bivens. "My question is, what kind of loss would a potential buyer have to absorb?"

Because Borden's dairy network is multifaceted and geographically widespread, finding a single buyer may be impractical, and it is likely to be worth more to KKR broken into pieces. Many regional dairies are watching the situation expectantly, waiting for local facilities to come on the market.

KKR's complex offer

Before that can happen, though, the complicated transaction must be completed. The two-pronged deal includes KKR's acquisition of all outstanding Borden stock in exchange for $2 billion of its shares in food and tobacco giant RJR Nabisco. Borden shareholders will receive shares of RJR stock valued by the partnership at $14.25 each. The purchase price represents a premium of 22.6% over the closing market price of Borden common stock on Friday, Sept. 9, before the announcement.

Secondly, RJR will acquire a 20% stake in Borden by issuing an additional $500 million of its own stock to Borden. That transaction will leave KKR with an 80% stake in Borden and a 17.5% stake in RJR, a significant decline from the current 35%.

In another move that may have been designed to pressure shareholders into accepting the deal, Borden slashed its quarterly dividend in late September to a penny a share from 7.5 cents. The action will save $8.75 million per quarter, Borden says, claiming the cut was planned before the KKR bid came along.

The Kazarian factor

Regardless of what happens, Borden's top leadership is covered. Media reports say that the company's top 20 executives will remain protected under "golden parachute" contracts that compensate them even if they lose their jobs in a management shake-up. Bob Allen, president of the ailing dairy division, is likely included in that group.

No one would like to shake Borden up more than financier Paul Kazarian, the former Goldman Sachs investment banker who gained fame for his turn-around of Allegheny International (now Sunbeam-Oster). In a last-minute meeting with Borden officials in late September, Kazarian offered a turnaround plan including payment of $16 to $18 per share for as much as 90% of the company. However, Kazarian failed to detail how his firm, Japonica Partners, would finance the proposal, causing Borden management to more or less dismiss his bid.

Hold on, Elsie. This could be a wild ride.

COPYRIGHT 1994 BNP Media
COPYRIGHT 2008 Gale, Cengage Learning