Sell-Offs:A Question of Power

It’s widely acknowledged that the small player in a rapidly consolidating industry faces uncertain, if not outright harsh, prospects that often turn it into a candidate for acquisition. But to a greater degree, even big players are running into trouble shaking off the damages from restructuring turbulence and trying to reach critical decisions about the future. The latest example is ITT Industries Inc.’s disclosure that it has under intense consideration whether it wants to keep or sell the bulk of its auto parts business and remain a big-time factor in an industry that is consolidating and becoming increasingly competitive at the same time. This is no routine task involving a peripheral, expendable operation. Auto parts accounted for more than half of ITT’s 1997 sales of $8.5 billion, and the units that may go on the block comprised 46% of total volume, or $3.9 billion. The company is considering divestiture of its brake and chassis and electronic systems businesses, both of which are historically strong suppliers to the automotive industry. At present, it plans to keep a relatively modest stake in auto parts by retaining its components and switch business. Conditions are changing at lightning speed in auto parts largely because the Big Three auto makers are outsourcing more components manufacturing but farming the work out to fewer players and demanding both premium quality and low prices for their lucrative business. More recently, the automobile service and parts retailing sectors of the marketplace have been consolidating with similar demands. Few small suppliers in the highly fragmented industry can weather those shock waves. Yet, the ITT project suggests that the storm trends are taking their toll of bigger players as well. If ITT opts for divestiture, it may be sacrificing sales but wind up with a better bottom line. Despite the auto parts domination of the top line, the business is the least profitable of ITT’s three principal product lines. Far more of the profit load is being carried by the company’s other two main businesses pumps and other fluids-handling equipment and defense and electronic systems. Growing the auto parts business through acquisition is an alternative to departure but not an especially appealing route because of the squeeze on margins. Good Timing If sell-offs are set, ITT could benefit from impeccable timing. Its businesses would be in demand by the consolidation drivers who want to hang in and would be willing to pay premium prices. The proceeds then could be redeployed into acquisitions and other developmental projects to increase share and market power in pumps and electronics. Break-up plays continued in still other industries connected only by consolidation and other drivers of strategic change. Pulitzer Publishing Co. said it was open to bids for its extensive broadcast holdings nine TV and five radio stations largely because this was a propitious time to sell. Thanks to federal deregulation initiatives allowing companies to own huge numbers of outlets in both sectors, the radio and TV broadcasting industry has been consolidating at warp speed. Pulitzer would refocus concentration on its newspaper operations. In the energy field, one of the last vestiges of 1970s-style petroleum-company diversification was close to being taken apart. Atlantic Richfield Co. agreed to sell its American coal operations to Arch Coal Co. for $1.4 billion. Arch, which, symbolic of the industry’s restructuring, was formed through the merger of privately owned Arch Mineral and the Ashland Coal subsidiary of Ashland Inc., would become the second-largest coal mine operator in the U.S. * Joint Ventures When Three’s Not a Crowd Companies in the chemicals fields have been wrestling with one of the trickier industry restructurings, a process complicated by intense fragmentation in product lines, customer bases, and the ladder of technological know-how. With the lengthy overhaul embracing all types of formats, e.g., acquisitions, spin-offs, divestitures, JVs, it is perhaps not surprising that one of the more unusual twists on the process has been engineered within the chemical industry. For what is believed the first move of its kind, a third partner has joined an established “near-merger” JV set up by two competitors. The company is Occidental Petroleum Corp., in the throes of a protracted restructuring and simplification process, which has agreed to contribute its petrochemical operations to the existing Equistar joint venture. Equistar took shape in early 1998 as a merger of the petrochemicals businesses of Lyondell Petrochemical Co. and Millenium Chemicals Inc., with the two owners retaining separate identities to manage other operations. Occidental is tossing into the mix about $2 billion in assets, including five plants and 950 miles of product pipeline. Equistar becomes one of the world’s largest producers of ethylene and products derived from that petrochemical with the capacity to produce 11.4 billion pounds a year, an important factor in a business segment dependent on large scale for economies in production and marketing to a large customer base. * World Scene Mustering Strength For Future Battles Consolidations spice the deal flow in Europe with major hook-ups in the megadeal class slated in the insurance and chemicals industries. Britain’s insurance industry, already an arena for huge combinations, added another to the slate with the merger agreement by two key players, Commercial Union PLC and General Accident PLC with a value of $11.7 billion. The intention was to create a combined company that was big enough to compete across Europe, where insurance industry consolidation has been common in preparation for the universal euro-currency. On the Continent and in the U.K., insurance companies have been merging with each other. An additional trend on the Continent has been acquisition of insurers by banks. The latest major yoking of chemicals companies is in Germany and it embraces a merger of Degussa AG with the Huels AG subsidiary of Veba AG, which already owns 36% of Degussa. The resulting firm would be one of the 10 largest chemical companies in the world. Veba would hold nearly a two-thirds interest in the company. * Takeover Defenses Convenient Time For a Vote Change Marriott International Inc. raised hackles among shareholders when it tried to tuck a strong defense mechanism into its latest restructuring move. Under the basic reorganization which was approved by shareholders in mid-March, Marriott International merged its food service and facilities management business with the North American operations of French-based Sodexho Alliance SA. But that combination went forward without a companion proposal to establish a supervoting class of common stock in the newly formed Marriott International which will remain in hotels and related businesses. Marriott dropped the proposal for a new class with 10 times the voting power of existing common in fear that it threatened the restructuring. But it hasn’t given up on the idea and planned to put it before stockholders at the annual meeting in May. Other companies that proposed or voted in multiple common classes in late 1997 and early 1998 were Hach Co., American Business Information, and Herbalife International. On the side of loosening defenses, Dart Group moved to eliminate its dual-class common and Walt Disney Co. said it would ask stockholders to drop its staggered board. Poison pill volume was high in the second half of 1997 and early in 1998, with shareholders rights installations by directors at these companies: Abiomed; Administaff; H.F. Ahmanson; Allmerica Financial; ALPHARMA; AmeriCredit; Anchor Bancorp Wisconsin; Applied Industrial Technologies; ARV Assisted Living; Aspen Technology; Autoliv; Avalon Properties; Barrett Resources; Bay Apartment Communities; BEI Electronics; Bellwether Petroleum; Berg Electronics; Burlington Industries; California Water Service; Cameron Ashley Building Products; Cash America International; Ciena Corp.; Community Financial Group; Coram Healthcare; Corrpro Cos.; Cytyc Corp.; Dart Group; Data Transmission Network; Deere & Co.; DT Industries; DTE Energy; Farm Family Holdings; First Indiana; Forcenergy; Geneva Steel; Hawaiian Electric Industries; Highwoods Properties; ICO Inc.; and IVAX Corp. Also: Liberty Property Trust; Lone Star Steakhouse & Saloon; Magnum Hunter Resources; Maxxim Medical; Micrion Corp.; Merit Medical Systems; Monterey Resources; National Surgery Centers; Nine West; Noble Affiliates; Oak Hill Financial; Ocean Energy; Ophthalmic Images; PMI Group; PSC Inc.; Pacific Gulf Properties; Piedmont Natural Gas; Premiumwear Inc.; Progressive Bancorp; Prentiss Properties Trust; Rocky Shoes & Boots; Scientific Games Holdings; Secure Computing; ShowBiz Pizza Time; Station Casinos; Suiza Food; Swift Energy; Toll Brothers; Toys “R” Us; Trigon Healthcare; Unicom Inc.; Union Texas Petroleum; and United Dominion Realty Trust. Companies spun off with pills in their capital structures included ComScope, Freeport McMoRan Sulfur, General Instrument, Hussman International, Midas Group, and UNOVA Inc. * Out the Window The Harder They Fall At a time when an increasing number of megadeals are routinely executed, the sobering reality is that some might not make it. As recent experience suggests, the bigger the deal, the greater the complications and the more vulnerable the transaction is to personality clashes. One of the deals that succumbed to that combination was the proposed merger of pharmaceuticals giants Glaxo Wellcome PLC and SmithKline Beecham PLC which was on its way to becoming far and away the most expensive combination in history, with a price tag estimated at $70 billion. But the epic transaction was scrubbed just short of a final agreement amid a conflict over future management and governance of the combined organization. SmithKline claimed that Glaxo demanded changes in previously agreed-to terms that would put Glaxo in charge in place of a merger-of-equals set-up. Hilton Hotels Corp. continued suffering a streak of bad luck in trying to expand through acquisition when its talks with casino operator Circus Circus Enterprises Inc. collapsed early in the due diligence stage. A complex structure for the $2.8 billion deal had Hilton merging its gambling business with Circus Circus and splitting off its hotel operations into a separate company. The breakdown was attributed to a number of issues, including conflicts on valuation, postmerger management of the gambling firm, and tax consequences.