You're the Cream in My Coffee

By Stephen Koepp

A Swiss food conglomerate buys a dairy giant for $3 billion

Nestle has long had a keen appetite for U.S. companies. In a buying binge during the '70s, the Swiss food conglomerate helped itself to Beech-Nut (baby foods), Libby, McNeill & Libby (fruit juices) and Stouffer (hotels and frozen dinners). But Nestle then decided to halt its U.S. expansion because of heavy financial losses suffered in Argentina.

Now, after nearly four years of retrenchment, Nestle (1983 sales: $12.7 billion) is once again hungry to add American names to its list of bestselling brands, which includes Nescafe, Quik, Nestea and L'Oreal. In January, Nestle acquired Ward-Johnston, the candy company that produces such matinee munchies as Raisinets, Goobers and Sno-Caps, and in April it signed an agreement to buy Hills Bros, coffee. Last week the company announced plans to purchase Los Angeles-based Carnation, the leading maker of evaporated milk, for about $3 billion, or $83 a share. The deal will produce the biggest non-oil takeover in history, and is expected to double Nestle's business in the U.S. The transaction will provide a barrel of cash for the heirs of Carnation Founder Elbridge Amos Stuart, who own 35% of the firm.

The spark for the sale came last November; Dwight L. Stuart, 59, left his post as Carnation president, reportedly after a falling-out with Chairman H. Everett Olson, 77. Stuart, who controls as much as 20% of the firm, then decided to start unloading his stock. Rumors began spreading on Wall Street that Carnation was for sale, and by late July, Nestle Managing Director Helmut Maucher came along with a friendly takeover offer. Meanwhile, investors ran up the price of Carnation stock from about 65 in July to 75 1/2 by the time the deal was announced.

As if in keeping with the old motto on its best-known product, "Milk from contented cows," Carnation has grown somewhat complacent in recent years. In more aggressive times it bought the Contadina tomato-products brand and created Friskies pet foods and Coffee-Mate nondairy creamer. But Carnation's last acquisition of any size was the $30 million purchase in 1973 of a company that makes class rings. Since 1980 sales have been flat (1983 revenues: $3.4 billion). Says Dan B. Williams, an analyst with Sutro & Co., a San Francisco investment banking firm: "Some observers think Carnation has been stodgy in new-product introductions. Its mainstay is milk, and dry milk is a no-growth area." That highly cautious strategy was dictated by Olson, who takes pride in Carnation's record of 31 straight years of increased annual earnings.

Like many other European companies, Nestle is looking for acquisitions in the U.S. because that is where the fastest, surest economic growth is now taking place. Last January, Nestle burnished its public image in the U.S. by settling a 6 1/2-year-old consumer boycott prompted by the company's marketing of infant formula in developing countries.

Nestle has encountered some obstacles during its current spending spree. In July the Federal Trade Commission blocked the Swiss firm's $515 million takeover of CooperVision, a California contact-lens company. Reason: Nestle already sells certain types of eye-care supplies through a Fort Worth subsidiary, Alcon Laboratories. There has been speculation that the FTC might oppose the creation of a food combine the size of Nestle and Carnation. Experts close to the deal, however, expect little difficulty because the companies do not have significant competing products. Nestle sells no milk in the U.S., and Carnation sells no coffee.

The Nestle-Carnation deal continues a streak of mergers in the competitive food industry. Last month Chicago's Beatrice (Tropicana, La Choy) bought Esmark (Swift, Peter Pan) for $2.8 billion. Two weeks ago, Ralston Purina agreed to acquire ITT's Continental Baking division for $475 million. One reason for the takeovers is that business has turned sluggish as a result of the slowdown in U.S. population growth. Thus the easiest way for food companies to grow is to take over other firms. And as the Carnation purchase indicated, cows that are too contented may find themselves on the auction block.

With reporting by Laura Meyers, Ellen Wallace