When the directors of E-II Holdings Inc. meet this week, they may have to stifle a few laughs as they deliberate a $13-a-share, or $870 million, offer from American Brands Inc.
Donald Kelly, E-II chairman and chief executive, played it straight last week when he announced that he expects to advise shareholders of the board`s view about the offer on or before Feb. 1. Sources inside and outside the company say the offer will get short shrift at the meeting.
A source close to Kelly said that company officials were more amused than threatened by the offer.
”It`s kind of an insulting offer in terms of numbers,” agreed Roger Spencer, an analyst with PaineWebber Group in Chicago. ”There`s no way they can get it at $13-$25, maybe. There`ll be some chuckles at that meeting.”
Spencer said that Kelly was highly unlikely to sell for $13 a stock that opened last summer at $15 a share.
”Thirteen dollars would be buying at retail and selling at wholesale,” he said. ”Kelly doesn`t do that.”
Ronald Morrow, an analyst with Smith Barney, Harris Upham & Co. in New York, agreed.
”Kelly says that everything is for sale, but not for less than $15. He`d lose his credibility,” Morrow said.
The market tended to agree that the offer was not to be taken seriously, Spencer said. On Friday, E-II rose 62 cents a share to $12.37 in trading on the New York Stock Exchange.
American Brands also climbed 62 cents, to $47.37, a movement Spencer interpreted as showing that Wall Street believes American Brands is still being pursued.
Spencer labeled the offer a ”Pac-man” attack, a sort of preemptive strike by the larger tobacco and consumer foods conglomerate at smaller E-II for taking an unwelcome stake in the Old Greenwich, Conn.-based American Brands.
”They are just trying to keep Kelly out,” Morrow said. ”They`re making noise like they`re interested in E-II, but that`s nonsense.”
And finding a welcome reception among E-II shareholders may be very difficult, Spencer said.
When E-II was spun off last summer from Beatrice Co., a majority of the stock wound up in ”friendly hands,” including those of Kelly, members of management and Kohlberg Kravis Roberts & Co., the New York firm that took Beatrice private in 1986 along with Kelly.
”When E-II was organized, Kelly and the other guys knew that they would be going after bigger companies,” Spencer said. ”But they were prepared for offers like American Brands`, in that they have so much stock in friendly hands.”
Spencer estimated that Kelly, his management and Kohlberg Kravis control more than 45 percent of E-II`s estimated 67 million shares.
”And with Kelly`s institutional buddies also having stakes, there is no way American could get 51 percent,” Spencer said. ”It looks like they`re desperate.”
Asked why American would be desperate after it had passed a poison pill resolution last year to ward off hostile takeovers, Spencer responded:
”Tell me about all the poison pills that hold up to a cash offer. There has never been a poison pill triggered, to my knowledge. If the
(American Brands) board turns down a bona fide bid, they can be sued.”
And the prospect of a ”white knight” buying up enough American Brands shares to rescue American from Kelly seemed slim to Spencer.
”They don`t have a big core business that a Unilever or a General Mills would want. I don`t think that a white knight is the answer. The answer for them is they are going to have to overpay for E-II.”
Morrow said he felt that the offer was a ploy ”to force Kelly`s hand. Now he is likely to do something.”
Efforts to reach Kelly Friday were unsuccessful.
In a statement, however, Kelly asked that stockholders defer action on the offer until the board takes a position.
The all-cash, $13-a-share tender offer for E-II stock runs through Feb. 19. American Brands will also offer to buy much of E-II`s outstanding debt, which would cost it about $1.5 billion.
Couple the $1.5 billion with $870 million for the stock, and it would cost American Brands about $2.37 billion to buy E-II. But American Brands would also get about $844 million that E-II has in cash and short-term investments, thus reducing to about $1.53 billion what it would have to pay for E-II.
But Kelly is ready to use the cash and cash equivalents to shop for acquisitions. Analysts say that American Brands could be bought for between $7 billion and $8 billion, but that Kelly would offer less.
In an interview last summer, Kelly said he was willing to pay ”$5 billion, $10 billion” for a major acquisition. Questioned after a meeting earlier this month with American Brands, Kelly chuckled at published reports that American Brands could be had for as little as $5 billion. E-II owns a 4.74 percent stake, or about 5.2 million shares, in American Brands.
Chicago-based E-II has been shopping since last summer, when it was spun off from Beatrice Co. E-II represents largely the nonfood operations of Beatrice.
Earlier this month, Kelly told American Brands he planned to nominate himself and five others for election as directors, and he has refused to rule out a proxy fight.
Following that announcement, he held what was described by sources as a ”cordial” meeting with William Alley, American Brands chairman and chief executive, but no further talks were scheduled.
In announcing its offer, American Brands said that if it were offered a majority of E-II`s shares, it would give all remaining stockholders the right to sell their shares for $13.
American Brands outlined how it sees its operating units meshing with the pieces of E-II. American Brands said it would substantially cut E-II`s overhead costs.
Alley said: ”We are making this offer because it represents an attractive business opportunity and because it deals with the threat of dismemberment of American Brands posed by E-II`s interest in-and apparent intentions toward-our company.”
Smith Barney`s Morrow is an unbeliever.
”Even at $13 a share, it doesn`t look like a great deal for American Brands,” he said. ”But then Kelly may well say, `Don`t come after me and I won`t come after you for a year or so.` ”
American Brands said it wants to merge E-II into one of its wholly owned subsidiaries, AMBR Holdings Inc.
If the deal were to go through, it would be the second time around for Kelly, who saw his job disappear once before when his target did a turnabout. Kelly formerly was chief executive of Esmark Inc., which bought a stake in Beatrice. As with American Brands, the stake was less than 5 percent. Beatrice Chief Executive James Dutt considered Esmark`s stake a prelude to a buyout and was furious that Kelly might have his eye on Beatrice. Dutt pulled a turnabout and bought Esmark for a premium price in 1984. Kelly was not part of the deal, but as a major stockholder he profited handsomely.
Dutt was fired in 1985, and in 1986 Beatrice was sold to Kohlberg Kravis-and Kelly. Kelly moved into the chief executive`s office at Beatrice in what was considered one of the biggest business ironies of the decade.
