Last February, Donald E. Nordlund, Staley Continental Inc.`s chairman and chief executive, put out word that his company was interested in moving its headquarters to the Chicago suburbs.
Nordlund figured that such a move would provide a convenient buffer zone between the company`s 79-year-old corn-refining operations in its hometown of Decatur, Ill., and its newly acquired food-distribution business in Chicago.
So Nordlund`s curiosity was piqued when he got a call alerting him to space that McGraw-Edison Co. was vacating atop a 12-story building in northwest suburban Rolling Meadows. Staley not only took the space, it also hired some of McGraw-Edison`s employees and bought the electric-products maker`s office furniture, its typewriters and even its blue-and-white china coffee cups.
Staley`s luck in finding such an easy way to move illustrates how things are finally starting to fall into place for a company whose name once seemed on the verge of becoming a synonym for investor frustration.
In the last nine months, Staley, formerly known as A.E. Staley Manufacturing Co., outbid Dart & Kraft Inc. to buy Chicago-based CFS Continental Inc., the second largest company in the fast-growing food-service industry, and unloaded a money-losing soybean-processing division.
It also has seen a decade-old dream come true. Its most important product, high-fructose corn syrup, a sugar substitute, won full acceptance from the major soft-drink bottlers last fall, and the resultant surge in orders has sopped up much of the industry`s surplus manufacturing capacity and raised the prospect of relief from recent depressed price levels.
Together, these three developments clearly mark what the distinguished-looking Nordlund, the chief executive since 1973, calls ”a turning point for the old Staley company.”
Indeed, the whole character of the company seems to be changing. Gone may be the days when Staley was notorious on Wall Street for wild and maddening swings in its earnings and stock price. Here to stay may be a less-spectacular company that nonetheless promises to achieve the kind of steady growth that is more comforting to most investors.
The sale of the soybean operations, for about $130 million, cut Staley`s dependence on volatile raw-commodities markets, while the soft-drink makers`
approval of corn syrup as a full, rather than partial, substitute for sugar appears to have signaled the end of a manic-depressive period in that part of the company`s business.
Meanwhile, the $353 million acquisition of CFS Continental, which delivers food and supplies to fast-food and other restaurants, speeded a long- planned diversification into the more consistently profitable service end of the food chain.
It also gave the company a new focus for the future: Nordlund said additional acquisitions in food-service or similar fields will be the company`s ”main thrust for the next couple of years.”
”If you look at the changes they`ve made, you have to say to yourself that they`ve done a pretty commendable job of restructuring themselves,” said Leonard Teitelbaum, a Merrill Lynch analyst. The CFS Continental acquisition
”gives them a direction to grow in that we think is very attractive for a food company.”
”This is a company that has disappointed investors,” said John M. McMillin, an analyst at Prudential Bache Securities. ”It`s always been a manana stock, a tomorrow stock. I`ve been negative on the stock in the past, but now I think that manana is almost here.”
Still, McMillin stressed that he was recommending the stock only for possible long-term appreciation, while other analysts–and Staley officials
–cautioned that there is still more bad news to come before the company`s recovery takes hold.
As Nordlund pointed out at the company`s annual meeting in February, the current fiscal year, ending Sept. 30, is a ”year of transition,” and Staley won`t start realizing the benefits from most of its recent moves until sometime in fiscal 1986.
Low-priced corn-syrup contracts signed before demand picked up, high interest costs stemming from its admittedly top-dollar purchase of CFS Continental and losses on the soybean operations, sold in January, have combined to slash the company`s net earnings 42 percent for the first nine months of the year. Staley also has suffered from a weak market for its processed-corn byproducts, particularly animal feed sold in Europe.
What`s more, Nordlund predicted recently that fourth-quarter results also would trail year-earlier levels, so most analysts have cut their earnings estimates for the full year to $17 million to $20 million, or about half of last year`s $36.6 million.
Nonetheless, the analysts don`t seem too depressed about these problems. In interviews, most preferred to talk about fiscal 1986, and what they see as the potential for the company`s net earnings to soar to $65 million to $70 million, or their highest level since the company posted a record profit of $105.8 million in fiscal 1981.
According to the analysts, the key to such a resurgence is likely to be a modest–and probably lasting–increase in high-fructose corn syrup prices, probably in January.
Since the revolutionary sweetener made its debut in the mid- to late 1970s, the four leading manufacturers–Archer Daniels Midland Co., Staley, Cargill Inc. and CPC International–frequently have been their own worst enemies on pricing.
In their headlong pursuit of sales, they often have added too much manufacturing capacity too quickly and have had to roll back prices to extremely low levels.
The companies say they had to show they had sufficient capacity before they could induce the bottlers to make each step in their phased switch from sugar, which is much more expensive than corn syrup but easier to obtain.
Several frustrated analysts have complained, however, that the companies seemed determined to ”shoot themselves in the feet” or commit ”sweetener suicide.”
It was this type of poor pricing environment last fall that prompted Staley, No. 2 in the industry, and some of the other companies to offer Coca- Cola Co. and PepsiCo Inc., the two largest soft-drink makers, one-year price guarantees at a disappointing 17 cents per dry pound.
However, the cheap contracts also had a beneficial effect: They encouraged Coke and Pepsi to boost their use of corn syrup to 100 percent of the sweetener in their regular drinks from 60 to 75 percent.
Analysts say this in turn set off a surge in demand that has tightened syrup supplies and probably given the manufacturers the leverage they need to boost contract prices by 3 or 4 cents a pound when they come up for renewal.
”I think the point is that this year we`re seeing a change from a buyer`s market to a seller`s market,” said Prudential Bache`s McMillin,
”because the bottlers have no more to offer the refiners now that they are at 100 percent.”
Nordlund agreed. ”I don`t know whether the big users will want prices that cover a year or a quarter,” he said, ”but whatever their approaches, prices will be higher.”
Staley next year is expected to make about 2.8 billion pounds of the type of syrup used in soft drinks. So it is clear that slightly higher prices, coupled with the lower corn-purchase costs likely to result from the huge harvest expected this fall, could translate into a huge jump in the company`s earnings.
Even though the demand for high-fructose corn syrup is likely to slow as diet drinks using the artificial sweetener aspartame gain popularity, most analysts expect it to continue to grow at about 2 to 3 percent a year.
So barring a sharp decline in the price of sugar, which is considered unlikely, Staley`s corn-refining division, which also makes starches, is likely to remain a significant source of earnings for the rest of the decade, company officials and analysts said.
This means, they agreed, that Staley should have a large pool of money available for paying off the debt from the CFS Continental purchase and for making further acquisitions.
The big question, then, will be how Nordlund decides to divide the money between CFS, other potential acquisitions and the company`s research programs aimed at developing new products.
Several analysts said they hoped most of the money would go to CFS Continental, which will account for half of Staley`s $3 billion in annual sales and is solidly positioned behind Houston-based Sysco Corp. as the second-leading company in the food-service industry.
They said the high degree of fragmentation in the field–smaller family-run and regional companies still account for the bulk of the sales–should provide a plentiful supply of attractive acquisition candidates.
Nordlund said Staley clearly intended to make more food-service acquisitions–indeed, CFS Continental paid $100 million for an East Coast firm shortly after it joined Staley–but he indicated that Staley also might decide to acquire or develop a third leg for the company, also in a food-related business.
Nordlund, 63, said another priority would be to identify a successor. Analysts speculated that the leading candidate would be Robert M. Powers, president of the company`s corn-refining division. They said CFS Continental`s Cohn brothers–Robert, 59, the chairman, and Alvin, 64, the president, who signed three-year contracts with Staley–would probably be considered too old for the job.
At least one analyst, though, said the question of succession might not make that much difference. Prudential Bache`s McMillin said he felt there was ”a 30 percent chance” that an even bigger food company like Coca-Cola might find a rejuvenated Staley to be an attractive takeover target itself.
