Philip Morris Raising Lines To $15 Billion
In a move that may presage an acquisition or additional share buybacks, Philip Morris Cos. Inc. is negotiating a $15 billion credit line that would replace its $12 billion facility, according to sources familiar with the talks.
The new facility is expected to expire after three years and would replace the $12 billion revolving credit line that matures in March 1993. The existing credit line, one of the biggest ever arranged, was used to finance Philip Morris' acquisition of Kraft Inc. three years ago.
George Lewis, Philip Morris' treasurer, declined to comment on Friday. A spokeswoman for Citicorp, the company's lead bank, also declined to comment.
New York-based Philip Morris, a worldwide consumer products giant with $46.5 billion in assets, is cash-rich and was thought to have enough money on hand to service its working capital needs. That has prompted analysts to speculate the company may be laying the groundwork to launch an acquisition or buy back more of its shares. The company has said it intends to spend up to $1.5 billion to repurchase common stock through 1992.
"The company has been repositioning itself in nontobacco businesses and continues to do share repurchases," said William Wetreich, an analyst at Standard & Poor's Corp. "Those are likely avenues" for the [new] funds, he said.
Since May, shares of Philip Morris have fallen around 8%, while the Dow Jones Industrial Average has fallen about 2%. The company's stock was trading at $63.50, down 62.5 cents, Friday afternoon.
Still, Philip Morris may indeed have a need for more working capital because of last year's $4.1 billion acquisition of Jacobs Suchard AG., a confectionary and coffee producer.
Move to Extend Payments
Also, bankers say companies are moving to stretch out their loan payments in order to keep more cash on hand.
Even among high-quality names, "an awful lot of companies got nervous about their liquidity" in the last six months, said one money-center banker.
But Philip Morris, whose brands include Miller beer, Oscar Mayer hot dogs, and Marlboro cigarettes, has let it be known that it wants to continue to making strategic acquisitions and diversify its revenue base away from tobacco businesses.
It has spent $20 billion to acquire food companies since 1985, and analysts have speculated that Quaker Oats, Campbell Soup, and Pet Inc. could be future targets.
While Philip Morris' 57% ratio of debt to capital is relatively high, its excess cash flow is exceptional. The company earned $3.54 billion, or $3.83 per share, in the fiscal year 1990 on cash flow of $5.4 billion.
Shearson Lehman Brothers estimated the company will have an excess average cash flow of $3.6 billion for the next five years. That means the conglomerate has plenty of room on its balance sheet for additional debt.
The $12 billion credit line, which was arranged by Citicorp, has an interest rate of 25 basis points over the London interbank offered rate. It carries a commitment fee of 10 basis points.
The syndicate of domestic and international banks include the banking units of Chemical Banking Corp., BankAmerica Corp., Bankers Trust New York Corp., Swiss Bank Corp., Dai-Ichi Kangyo Ltd., Sumitomo Bank Ltd., and Manufacturers Hanover Corp.
Philip Morris' total debt is roughly $17 billion, of which $15 billion is long-term. But analysts say the company could pay down all of its debt in five years, which is why it carries a single-A rating from Standard & Poor's.