(Dow Jones)Monsanto Sets Restructuring To Finance Move Into Life-Sciences Field
November 11, 1998 7:58 PM
NEW YORK -(Dow Jones)- Monsanto Co. late Wednesday revealed a
series of restructuring moves and other steps aimed at strengthening its
bid for a dominant position in the burgeoning life-sciences field.
The steps, which include up to 2,500 possible job cuts, asset sales and
the issuance of $4 billion in new debt and equity, are designed to aid the
financing of Monsanto's recent seed company acquisitions, and come on
the heels of the chemical and biotech giant's failed merger with American
Home Products Corp.
With that source of funding now dry, St. Louis-based Monsanto (MTC)
said it will finance its future through an offering of about $1 billion in
common stock, the issuance of about $2.5 billion in long-term,
unsecured debt, an offering about $500 million in other securities, savings
from shedding jobs and expected proceeds of about $1 billion from the
divestitures of noncore businesses.
Monsanto anticipates a 20% reduction in administrative costs next year.
As part of its cost-cutting plan, Monsanto will eliminate 700 to 1,000 jobs
by the first quarter of 1999 - most in administrative posts, including many
at executive levels. In addition to the jobs it will cut from ongoing
operations, Monsanto said planned divestitures will eliminate an
additional 1,300 to 1,500 jobs from its total work force of about 28,500.
The company expects to name within 60 days which operations it will
divest.
Monsanto said it will take $400 million to $600 million in pretax
fourth-quarter charges because of the restructuring measures, adding
that it expects to recoup the cost within 18 months through new cost
savings.
Monsanto and American Home Products (AHP) mutually agreed last
month to abandon their plan to merge in a $35 billion stock deal. Though
the deal had been given the thumbs-up from European regulators, the
Federal Trade Commission reportedly wanted the companies to divest as
much as $1 billion in assets. And the Justice Department was said to be
considering filing an antitrust suit against Monsanto in connection with
the company's acquisitions of seed companies and herbicide producers.
Monsanto's recent deals include agreements to buy Delta & Pine Land
Co. (DLP), Dekalb Genetics Corp. (DKB) and Cargill Inc.'s international
seed business. The buying spree was meant to position Monsanto as the
leading player in the field of life sciences - a meshing of genetics,
agriculture, chemistry and biotechnology.
Monsanto, which markets agricultural products, pharmaceuticals and
food ingredients, has been gobbling up plant-breeding companies over the
past three years as part of a strategy to make itself into a
crop-biotechnology power. In June, the company agreed to buy Cargill's
foreign seed operations for $1.4 billion, more than four times the annual
revenue of the business. In July, it agreed to buy a wheat-breeding
business from Unilever Group for $525 million, a premium for a businesss
that generates about $26 million in annual revenue, mostly from royalties.
At the time, the company said the purchase would cap off its recent
buying spree of seed companies.
Monsanto also won a three-month auction for DeKalb Genetics, a seed
and biotech firm, by offering $2.3 billion in cash and stock for the 60% of
the company it doesn't already own. It also also agreed to buy Delta &
Pine Land, a breeder of cotton seeds, for about $1.9 billion in stock.
Though expensive, the acquisitions give Monsanto an army that rivals the
muscle of the biotechnology alliance formed last year between DuPont
Co. (DD) and Pioneer Hi-Bred International Inc. (PHB).
The huge premiums paid by Monsanto reflect the intense race by the
globe's chemicals giants to build businesses that can exploit their
expanding knowledge about genetic engineering of plants. The
companies are snapping up everything from gene mappers to grain
millers in hopes of building "dirt-to-dinner" pipelines that can design and
process everything from new types of food to new sources of drugs and
even plastic.
Seed companies are particularly hot properties because they are the only
way a biotech company can get its inventions into the hands of farmers.
DeKalb Genetics was the last big U.S. seed company available for
purchase; it controls 11% of the lucrative North American corn-seed
market and holds strategically important patents on how to genetically
engineer crops, as well as patents on some of the most commercially
successful creations to date.
Monsanto's plan to finance the acquisitions received generally positive
reactions from analysts.
The steps are "pretty much as expected," said Richard Sporrer, an
analyst at Parker/Hunter Inc. During an analyst meeting in October, the
company "talked in generalities" about how it could raise the money to
fund its recent acquisitions, he said. Monsanto was looking to raise
about $4 billion, and its announced plans will raise in the neighborhood of
what it needs, he added.
In the third quarter, management had said it would try to avoid issuing
new equity and hinted that new financing plans would take place in 1999,
said Tom Brakel, an analyst with Mehta Partners of New York. So
Wednesday's announcement, while not a surprise, comes a little earlier
than expected, he noted. With all the positive news about the company's
arthritis drug Celebra, as well a number of products in phase three - the
most expensive phase of clinical development - they "probably decided
they needed money sooner rather than later," Brakel said.
Although Monsanto won't say for 60 days which businesss it will sell, the
answer probably lies in seeing what Monsanto does want to keep. Chief
Financial Officer Gary Crittenden said the company wants to hold on to
its core agricultural biotechnology and pharmaceutical businesses, as
well as its nutritional research operations. "Anything else," he said,
"essentially is an asset that is not strategic for us" and would consider
selling if the right offer were made.
The moves Monsanto announced will enable it to keep a lid on debt.
Currently, Monsanto has a debt-to-capitalization ratio of 50%. That will
rise to 59% after the company closes on its recent acquisitions, and will
drop back to 55% after the issue of common stock and the asset sales
are completed. After other securities convert to common stock, the ratio
will come down to 51%. Crittenden conceded that would still be above
what other companies in the industry carry, but said it was indicative of
the strong cash flow Monsanto expects to generate in the years to come.
Meanwhile, Monsanto's buying spree appears to be over, at least for now.
Monsanto Chairman and Chief Executive Robert Shapiro said Monsanto
doesn't plan to make "any additional major acquisitions once the
previously announced seed company transactions are completed."
On Wednesday, Monsanto's NYSE-listed shares closed at $38.688,
down 50 cents.
Analysts, on average, expect Monsanto to earn six cents a share,
excluding items, in the fourth quarter. The mean estimate of 14 analysts
surveyed by First Call is for core earnings of 89 cents a share for fiscal
1999.
In the year-ago fourth quarter, Monsanto posted net income from
continuing operations of $55 million, or nine cents a diluted share, on
revenue of $1.82 billion. For 1997, the company posted net income from
continuing operations of $294 million, or 48 cents a diluted share, on
revenue of $7.51 billion.
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