Call From Philip Morris

By Janice Castro

Maxwell House coffee. Log Cabin syrup. Oscar Mayer hot dogs. Jell-O. Birds Eye peas. From breakfast to dinner, millions of Americans eat General Foods products every day, never realizing that one company makes them all. While its products are household names, the firm, which had sales during its last fiscal year of $9 billion, is low-keyed, given to such simple boasts as "We sell more kinds of food and more of it." That tone may soon change. Last week General Foods was taken over by Philip Morris (1984 revenues: $13.8 billion), whose Marlboro man and Virginia Slims woman exemplify marketing pizazz.

Under the agreement, Philip Morris will pay $120 apiece in cash for 47.3 million shares of General Foods. At some $5.7 billion, the merger is the largest ever outside the oil industry. Moreover, the deal will give Philip Morris annual sales of about $23 billion, making it the biggest consumer- products firm in the U.S. Said General Foods Chairman James Ferguson: "We are convinced that Philip Morris' offer is in the best interests of our shareholders." In June, General Foods stock was trading at about $70.

Rumors of a merger between the largest American cigarette company and one of the biggest food-and-beverage firms had been wafting through Wall Street for months. Even so, the terse statement from General Foods early last week that it had received an "unsolicited telephone proposal" for a merger with an unidentified partner sent the company's stock from $84.88 to $110.25 in just three days.

Despite its size and the popularity of its products, General Foods has been viewed as ripe for takeover, in part because of its generally lackluster management. Cruising in the food industry's slow lane during the past five years as its competitors stepped up marketing efforts, the firm's sales growth averaged less than 4% from 1979 to 1984, while the rest of the industry was setting a 10% to 12% pace. Earnings slipped sharply during the quarter ending in June, falling to $77 million from $111 million a year earlier. Says William Leach, an analyst with Wall Street's Donaldson Lufkin & Jenrette: "General Foods just seems to have an inability to bring success down to the bottom line. A company like Sara Lee, which has a much weaker market position and fewer glamorous products, is turning out consistently more impressive earnings year after year."

The performance of General Foods' new products, a crucial sign of success for a food company, has been uneven. While the cereal division's Fruit & Fibre took off fast when it was introduced in 1982, another cereal, a blue concoction called Smurf-Berry Crunch, flopped.

The Philip Morris takeover of General Foods is part of the cigarette industry's diversification trend. Reason: U.S. cigarette sales have declined by about 4% during the past three years. In June, R.J. Reynolds, maker of Camel and Salem, bought Nabisco Brands for $4.9 billion. That development coincides with consolidation in the food industry. In addition to the Reynolds-Nabisco agreement, there were also mergers between Nestle and Carnation and Beatrice Foods and Esmark during the past 14 months.

Some security analysts disagreed with Philip Morris' decision to buy the food company. While General Foods stock was shooting up last week, the price of Philip Morris shares dipped from $77.63 to $75.63. Experts believe the $120-a-share price that Philip Morris paid is too high; they also point out that General Foods is in a field that is unlikely to enjoy spectacular growth. In an interview with the Wall Street Journal, Emanuel Goldman of Montgomery Securities in San Francisco said it would have been wiser for Philip Morris to buy a restaurant chain, where prospects are better. The cigarette maker, though, believes that its financial resources and marketing muscle can help turn the General Foods products into bigger winners.