The investment firm of Forstmann Little & Co. agreed to buy McGraw-Edison Co. for $1.3 billion, or $59 a share, the Rolling Meadows company said Friday. McGraw-Edison said in a statement that ”senior management will be offered an equity participation in the acquiring company.” It declined to elaborate on the statement.
Ted Forstmann, general partner of Forstmann Little, a private New York firm, said that in the ”eight or nine” companies his firm has bought under similar arrangements, including Dr Pepper Co., management holds 10 to 15 percent of the stock.
Analysts said the $59-a-share price was high. ”It`s amazing,” said an analyst who asked not to be identified. ”The $1.3 billion`s a big number. I think any shareholder should be pretty pleased.”
”One has to look at the $59, which is a 65 percent premium over book value at the end of 1984, as a very handsome premium,” said Kemp Fuller Jr., senior vice president of Moseley, Hallgarten, Estabrook & Weeden Inc.
Ted Forstmann said, ”It`s a very fair price, and we`re pleased with it.”
The previous record price of McGraw-Edison`s stock was $51 in 1981, Fuller said. The stock closed Thursday at $44.50, opened after a halt in trading Friday at $54, and closed Friday at $55.50.
Under the acquisition agreement, Forstmann Little will invest about $300 million of its capital, and the rest will come from bank loans, McGraw-Edison said.
Forstmann said his company will allow McGraw-Edison`s management to run the company as it is now.
”We think that the company has a group of core businesses that are very good businesses, and we think management is very good,” he said. McGraw-Edison produces electrical products for the industrial, utility, commercial and automotive markets.
”They`ve done a lot of things in the last four or five years,”
Forstmann said. ”They`ve bought and sold some (divisions). I don`t think everything they`ve done has been perfect, but what`s resulted out of all this is a strong company.”
Analyst Gail Landis of Sanford C. Bernstein & Co. disagreed. ”The results of the company haven`t demonstrated its full potential under current management,” Landis said. She added that McGraw Edison`s chairman, Edward J. Williams, is in his early 60s and ”he may want to get out.”
McGraw-Edison reported 1984 net income from continuing operations was $68.3 million, which was 65 percent higher than in 1983, on sales of $1.7 billion, up 17 percent from the year earlier.
Landis acknowledged this improvement, but added, ”It was a lot worse in 1983 than anyone thought it would be.”
Other analysts said McGraw-Edison`s business is sensitive to business cycles.
Forstmann responded that the company is ”much less cyclical” than a few years ago.
He said his firm had approached McGraw-Edison about the acquisition.
”Any company we look at has to meet our long-term investment goals and current objectives, and this company does,” he said.
McGraw-Edison`s board approved the agreement for the acquisition, but a definitive agreement still must be reached, and shareholders must approve the transaction. Also, bank financing must be completed, ”as well as the fulfillment of other customary conditions,” McGraw-Edison said.
The company has 16.5 million shares outstanding as well as 411,000 that would be issued if holders of employee stock options exercised those options. The $1.3 billion price is based on those shares plus debt to be assumed or refinanced in the acquisition, the company said.
Goldman, Sachs & Co. is financial adviser to McGraw-Edison in the transaction, it said.
