Elsie May Be Ailing, But Kkr Is Thinking Whipped Cream

To say the least, 1993 was a very difficult year for everyone with a stake in Borden.... All felt the impact of Borden's poor performance.... We want you to know that a new era has begun....

Acknowledging that your company is in trouble is hardly an encouraging way to begin an annual report. But Borden Inc. Chairman Frank J. Tasco and CEO Ervin R. Shames must have figured there was no point denying the obvious. Through a flawed acquisition strategy, Borden's former top brass had left the company indebted and unprofitable. The best Tasco and Shames could do was put a good face on Borden and hope someone would gobble it up.

Someone finally did. On Sept. 12, Kohlberg Kravis Roberts & Co., the New York leveraged buyout firm that owns RJR Nabisco Holdings, Safeway Stores, and Stop & Shop, among other companies, announced it would pay $2 billion for an 80% stake in Borden. Nabisco will purchase the remaining 20% with an option to take over a further 10% from KKR. Borden shareholders will receive $14.25 a share--in Nabisco stock.

A STEAL. The all-stock, no-cash deal is hardly a bonanza for Borden shareholders, who have watched their shares plummet from a high of more than 35 in 1992 to 115/8 just before the deal's announcement. The stock jumped two points on the news. But the deal is practically a steal for KKR, which will earn a $35 million fee from Borden if it falls through--and a $30 million bonus if another bidder takes the company with a higher offer.

Although Borden lost almost $1 billion in the past two years, the $5.5 billion company still owns such well-known brands as Cracker Jack, Wise potato chips, Creamette pasta, and Classico tomato sauce. Other holdings include a $1.4 billion dairy business and a $1.9 billion chemical operation that makes Elmer's glue. "For someone who has assets, there is value at Borden," says Robert Monks, a principal at Lens Inc., which owns 1.7 million Borden shares.

Indeed, some investors gripe the KKR bid is way too low. "If the board really believes that is the best possible deal for Borden shareholders, they're smoking something besides cigarettes," says Prudential Securities Inc. analyst John M. McMillin. But KKR's offer is probably as good as shareholders will get. Borden has been on the block since January. Hanson PLC expressed interest in buying the chemical business last Christmas but backed off. Borden investment banker Lazard Frres found no other suitors.

Nabisco, moreover, may need Borden almost as much as Borden needs help. "Nabisco has done all it can to sustain momentum," says Joel Weiner, a former Kraft-General Foods executive and a Nabisco shareholder. "To keep its stock moving, [KKR] has to do acquisitions."

"BIG LIE." With Nabisco's marketing savvy, Borden's foundering but famous brands, and KKR's deep pockets, both food companies can now expand aggressively. KKR says that Borden and Nabisco "will be operated completely independently." Don't bet on it. RJR CEO Charles M. Harper will probably take a seat on Borden's board. And food analysts predict Borden will be broken up and absorbed into Nabisco. Says McMillin: "I know [KKR] said they were not going to sell any of it, but that is a big lie from my standpoint."

Most likely to get tossed: Borden's chemical and dairy divisions. Analysts estimate that KKR could get $2.3 billion for the chemical division, which earned $168 million last year, and $100 million to $150 million for the unprofitable dairy operation, which includes Meadow Gold milk products--and Borden milk, famous for its Elsie the Cow logo. H.J. Heinz Co. and Dean Foods Co. are hungry for an asset sale. "This offers us opportunities," says Howard M. Dean, chairman and CEO. Adds Heinz CEO Anthony J.F. O'Reilly: "Borden has some good products. At the right price, [we] would be interested."

Nabisco also may find plenty of ways to wring profits from Borden. For instance, Steve Michaelson, a former Borden marketing executive, says that Nabisco's Fleischmann's margarine division has tried to persuade Borden to license its name for a new, fat-free cottage cheese. And Borden's pasta, sauce, and Wise chips could go well with Nabisco's Ortega Mexican-food business, says Mike Shantull, a former Nabisco executive who is now a partner at Meridian Consulting Group, which writes Ortega's annual marketing plan. Turning Borden around "is a classic case study of what KKR does best," says Burt P. Flickinger III, a consultant at A.T. Kearney & Associates. If he's right, this deal could bring a healthy moo from Elsie.