It has taken Quaker Oats Co. more than 20 years to get back to its basic grocery business. Chicago-based Quaker is getting ready to shed the final remnant of its diversification, troubled toymaker Fisher-Price, and no one is arguing the step isn`t the right thing to do.
With competition heating up, Quaker`s management needs to devote full attention to its lackluster packaged foods operations. Those include its well- known oatmeal, the energy drink Gatorade, Aunt Jemima breakfast products, Rice-a-Roni products and an array of pet foods such as Gaines Burgers and Ken- L Ration.
Still, as Quaker prepares to distribute Fisher-Price`s stock to its shareholders later this year, there are questions about what kind of acquisitions the company might make to fill its plate of brand names and whether Quaker might become a takeover target.
In late April, confirming weeks of speculation that it would divest Fisher-Price, Quaker announced that it will spin it off to stockholders as a tax-free dividend, creating a free-standing company. Fisher-Price, based in East Aurora, N.Y., accounted for 15 percent of Quaker`s $5.7 billion sales in 1989.
Some industry observers believe that Quaker, having endured Fisher-Price`s disappointing attempt at a broader product line, should wait and reap the benefits of its eventual turnaround, when the toy business could be sold for big chunk of cash.
But Quaker Chairman and Chief Executive William Smithburg doesn`t see it that way. An auction didn`t make sense because ”there are only a few potential buyers-other big toy companies,” he said, a situation that could create antitrust problems.
”Fisher-Price has a strong brand franchise and its turnaround is clearly achievable,” Smithburg said in an interview last week. ”We had a lot of people calling, asking if we would put it up for sale. There was no lack of interest.”
The spinoff should coincide with the beginnings of better times at Fisher-Price and that ”will bring a good price for shareholders long term and near term. That looks like a more attractive situation that putting it on the auction block and having a lot of people traipse through the plants and marketing plans,” Smithburg said.
The May 16 appointment of Ronald J. Jackson, former president of Kenner Parker Toys Inc., as Fisher-Price`s new chief executive is the first step toward the toymaker`s independence, Smithburg said.
”I got the best, Jackson was the man I wanted,” he said. Jackson, 46, who most recently was president of Stride Rite Corp. of Cambridge, Mass., also has experience in toy company spinoffs.
Jackson was Kenner Parker`s president after General Mills Inc. decided to spin off that business to its shareholders. Tonka Corp. acquired Kenner shortly afterward, in 1987.
Jackson is revamping Fisher-Price`s 1990 product offerings, which could make or break the company. ”I think we`ll be moving in the right direction by year-end,” Smithburg said but predicted that it would take several years for Fisher-Price to recapture its market position as the leader in preschool toys. The spinoff is expected to occur around the end of the year though no is set date.
Fisher-Price`s stock is expected to trade in the range of $4 to $6 a share after the spinoff. The price of Quaker`s stock, which had received almost no credit for ailing Fisher-Price, will more likely depend on prospects for its packaged foods businesses.
The stock has benefited a little from the spinoff`s potential, trading at more than $50 a share. But that`s still well below last year`s high of almost $69. The stock closed Friday at $50, up 25 cents, on the New York Stock Exchange.
”With Fisher-Price gone, Quaker can focus on food and delivering volume, which is down this year,” said analyst Roger Spencer with PaineWebber Group in Chicago.
In its first three fiscal quarters ended March 31, net income dropped 30 percent to $102.7 million, or $1.29 a share. Net sales increased to $3.62 billion from $3.52 billion.
Without Fisher-Price, the scaled-down Quaker could be an easy takeover target, analysts say.
Though its stock hasn`t been active enough to indicate there`s anything in the works, takeover specialists say that multinational food companies Nestle S.A. and Unilever and Philip Morris Cos. have plenty of cash and a stated desire to expand U.S. food operations. They might be interested as a strategic buyer, though a Quaker-Philip Morris combination might present antitrust problems.
An attempt at a friendly merger with Campbell Soup Co. fell through amid a family feud between descendants of Campbell`s founder.
Quaker officials have emphasized their desire to remain independent, and some believe boosting its stock price through a large acquisition is one way to do it.
Smithburg said he would like to acquire another strong consumer brand by the end of 1990, though he said the company wasn`t planning any deals in the immediate future.
Through an acquisition, Quaker would likely extend its product lines by adding another cereal or pet food, for example, or expanding its growing food- service business. Or, it might buy a business with food products targeted at the trends Quaker believes are driving the industry-consumer interest in a healthier lifestyle and convenience.
”We`re very high on acquisitions,” Smithburg said. ”I spend a good half day in my office every month just pouring over what`s out there. There are more and more things seeming to come to the market.
”We have a good balance sheet and an excellent track record for acquisitions. We could buy something small, a germ of an idea to grow. On the other hand, there`s no reason we can`t buy something for $500 million or $1 billion if it`s really good,” he said.
The company has made a number of small and medium-size acquisitions in recent years. A small one was a line of Pritikin salad dressings and other low-fat items. Quaker is working with the Pritikin Longevity Institute to develop other new items.
Quaker could use some hot new products to fire up U.S. grocery volume, hurt in part by oat bran`s plummeting popularity.
Sales of Quaker oat bran products, which had revenue of around $50 million a year, have plunged at least 50 percent since a controversial report in the New England Journal of Medicine challenged claims that oat bran helps lower serum cholesterol. Oatmeal sales were hurt as well.
Though the report dealt a blow to the oat bran craze, most believe that cereals will remain a prospering business for Quaker, which is working on other new product types.
Though it disappointed Wall Street this year, Quaker`s next fiscal year should be better, Smithburg predicted. ”In 1991 we`re targeting for volume growth in Gatorade, cereals and certainly in frozen foods. In key pet food brands we`ll do better,” he said.
”Hopefully, we`ll expand our position in the mini-meal arena,” said Smithburg, who is participating in weekly production kitchen tastings for new products.
”The biggest disappointment to consumers in the microwaveable mini-meal area is that products haven`t delivered on quality,” he said. He said he had just sampled Quaker`s new Oven Stuffs, stuffed turnovers and pastry shells scheduled for national rollout in July.
