When Dana G. Mead joined the giant conglomerate Tenneco Inc., he tried to sell off the company’s weak sister, J I Case, the farm implement and construction-equipment maker in Racine, Wis.
He offered Case to any taker for $1.
“I went to people I thought might be legitimate companies interested in the machinery business and said if you take the debt and everything else that goes with it, we would give it to you for a dollar,” said Mead, who three years later is chairman and chief executive officer of Houston-based Tenneco.
Perhaps the financial community was discouraged by Case’s 1991 results, a loss of $620 million; or 1992 results, a loss of another $260 million. Or the company’s $2 billion in excess inventory sitting on dealer lots. Or Case’s habit of discounting prices 20 to 40 percent every December, killing its margins.
But after three years of a strict restructuring program, including a $1.3 billion cash infusion by Tenneco, Case today has a stock market value of about $1.5 billion. It’s a company with a profitable present and a bright future; but that future no longer lies with Tenneco.
In the last year, Tenneco offered about 54 percent of Case for sale in a public offering, changing the name to Case Corp. The sale netted Tenneco $750 million.
In addition, Tenneco announced in December it intends to make another public offering: This time it will sell 100 percent of its chemical division, Albright & Wilson, based in Birmingham, England. The sale is expected to fetch more than $700 million.
Tenneco, a company with a strong Midwestern flavor, will be left with a core holding of Tenneco Automotive of Lincolnshire, maker of Monroe shocks and Walker mufflers; Packaging Corp. of America of Evanston; Newport News Shipbuilding, builder of nuclear-powered aircraft carriers; and Tenneco Gas, one of the nation’s largest natural gas pipeline companies. Tenneco was created as a natural gas company during World War II by Chicago financier Gardiner Symonds.
“The Tenneco strategy always, from Day 1, was to build value in these companies so that we would create options,” said Mead. “That’s mushy language which means, make them worth enough that you can either sell ’em, spin ’em out or operate ’em.”
Tenneco basically is trying to turn itself from a troubled conglomerate into a holding company with strong, steady earnings less tied to economic ups and downs. It will use proceeds from the Case and chemical company stock sales to fuel growth at the other companies, with the exception of Newport News.
While the shipyard, even with some civilian work, cannot be called a fast grower, Mead said Tenneco was unlikely to sell it. It would be difficult in the post-Cold War era to get someone to pay what the defense-oriented company was worth, he said.
Tenneco companies have gone on a fix-up and buy-up binge the last year, spending several hundred million dollars already.
“I’m having the most fun I’ve ever had in business,” said Richard A. Snell, president and chief executive officer of Tenneco Automotive. “I never had a company come to me before and say, `How fast can you spend money?’ “
Tenneco Automotive already has spent $113 million for Heinrich Gillet & Co., a German company that will help the company expand in exhaust systems and other components in Europe.
Packaging Corp. of America, or PCA, will spend $73 million to upgrade a linerboard factory. Tenneco Gas has announced a $70 million pipeline project in Australia and a $60 million acquisition of a power cogeneration facility.
But the biggest acquisition is yet to come.
PCA is searching for a $1 billion company to give it an instant presence in flexible packaging, a high-growth area where PCA is not represented.
“We would like to have a flexible package business; ours are all rigid,” Mead said. “We’re talking peanuts, popcorn, almonds. Higher end and faster growing. Most of the large flexible packaging companies might come with a price tag like that.”
Mead said the intention is to double the size of PCA within three to five years. The company had more than $2 billion in revenue last year. About half the business is boxes and linerboard, a cyclical business now reaping profits. PCA also is the world leader in rigid aluminum and plastic packaging.
“We’re not in the paper bag business; we’re in the high-tech end of a low-tech business,” said Paul T. Stecko, brought in to head the company a year ago from International Paper, where Mead spent much of his business career.
In addition to getting into the field of flexible packaging, Stecko said PCA expects to benefit from increasing demand in developing countries. One of the first things in high demand as countries become more modern is better packaging for food and other consumables.
PCA does a third of its business in the U.S., a third in Europe and the rest elsewhere in the world.
Most recently, PCA established a joint venture with China National Packaging Corp. Getting started doesn’t come with a high price tag: Stecko said PCA will spend about $25 million for the joint venture plant, capable of turning out 7,000 tons of material a year.
“That’s our beachhead in China. We’ll be seeing how it goes,” Stecko said. “If it goes well, you make more investments.”
International sales will be a vital growth area for Tenneco Automotive. This month, Tenneco Automotive announced its first joint venture in India, one of the strongest growth areas in the world for automobiles. Snell, the company president, said he is determined to open a facility in China this year as well.
“You might think the first thing they would want is roads; but no, the first thing they want is cars,” said Snell. “There is unbelievable growth about to take place in the rest of the world.”
With the strongest growth occurring outside the U.S., companies such as Tenneco have to go abroad to serve their existing automaker customers. The cash required for such growth puts a squeeze on smaller suppliers. Already the world’s biggest maker of exhaust and shock-absorbing systems, Tenneco has the cash to buy out the smaller companies unable to project themselves abroad.
Some of these could command a price tag up to $1 billion, Snell said, but that’s no magic figure. “We don’t have a mandate to be silly,” he said.
Not everyone agrees Tenneco’s strategy makes good sense.
“Tenneco’s made a big mistake,” said Gary Hovis, a financial analyst with Argus Research, who maintains a “buy” on Tenneco because he favors its overall prospects. “Case has the potential for excellent return. Farm implements and construction equipment are big things to be in over the next 10 to 15 years.”
Gary Schneider, an analyst with Bear Stearns, said the spinoff will help earnings three to four years from now, but selling Case denies Tenneco the benefit of several goods years ahead.
“Looking out longer term, if anybody still does that, the end result will add to earnings,” said Schneider, who maintains a “neutral” rating on the stock due to what he sees as a lack of near-term growth.
Mead said further sales from Tenneco’s remaining 45 percent of Case would come only if Tenneco determined the sale price offered better earnings prospects than the manufacturer. Under terms of a $1 billion financing for Case, Tenneco must hold at least 30 percent of the stock until Case pays off the loan in two years and its debt achieves investment grade status.
Mead said Case is doing so well he expects the company to pay off the loan early, perhaps in a year. Considering Case’s continuing strong stock price advance, Mead said, Tenneco would wait for a while to sell off any more.
Case’s transformation from weak sister to cash cow has been a storybook restructuring, complete with personal bravery and tragedy. It began under Michael H. Walsh, who took over Tenneco with a turnaround mandate in 1991. Walsh brought Mead on board in 1992 as a near-equal. Mead became Case’s chairman and chief executive officer
When Walsh discovered he had a cancerous brain tumor in 1993, more responsibility began to devolve to Mead. Walsh died May 6, 1994.
Mead is a retired army colonel who saw combat in Vietnam and then helped write the Pentagon Papers official account of the war. It fell to him to keep momentum going during his friend and colleague’s illness.
As Case began to slash costs, dump inventory, streamline operations and fire people, it became apparent the company might survive.
“The turnaround has been achieved: Rather than fixing and repairing, we are focusing on the future,” said Jean-Pierre Russo, brought in last year as Case president and chief executive officer.
“The uncertainty has been lifted. Our dealers, for instance, were always concerned Tenneco would break up Case and they would lose their franchises. The employees have a sense of pride working for a new company.”
Case has always had to fight from an underdog position: In farm implements, Deere had a better reputation for quality, Mead said; in construction equipment, Case faces many competitors including world giant Caterpillar.
Case cut an array of 60 tractor models down to a more manageable 16 and got quality standards up; it exited altogether from the low end for tractors; it continues to slash so-called failure costs, meaning such things as downtime and excess inventory, by hundreds of millions a year; and it ended the annual discounts.
“We are much more in control of our own destiny,” Russo said.
