Tenneco Inc.’s long-awaited decision to split in half pleases Wall Street by creating pure plays in the automotive and packaging industries, while heartening local boosters by giving the Chicago area two new Fortune 500-size companies.
The company said Thursday it will spin off its Tenneco Packaging unit to shareholders, giving such recognizable brand names as Hefty and Baggies their own home.
That will leave Tenneco Automotive as the only remaining unit of the Greenwich, Conn., company. While Tenneco Inc. is headquartered in Connecticut, both operating units are based in north suburban Lake Forest. After the split, expected to be effective this fall, the two companies will remain based in Lake Forest, while Connecticut operations are phased out.
Both companies will end up among the Fortune 500. The packaging unit is expected to have sales of $3 billion this year, while the automotive operations are projected at $3.2 billion.
Tenneco shareholders will receive one share of the new packaging company as a tax-free dividend.
The transaction will be the final step in dismantling what a decade ago was a classic American conglomerate, with interests as varied as farm equipment, specialty chemicals, plastic bags and shipbuilding.
The spinoff will create two huge companies. Tenneco Packaging has 15,500 employees working in 103 facilities in 16 countries. Tenneco Automotive has 23,600 employees at 74 facilities in 22 countries.
After the split, the companies will join two other former Tenneco brethren headquartered in this area–privately held Packaging Corp. of America, also in Lake Forest, and Case Corp. in Racine, Wis.
Word that Tenneco would soon give suburban Chicago two more corporate headquarters came just two days after consumer-prdoucts company Fortune Brands Inc. said that by year-end it would relocate its head office to Lincolnshire from Connecticut.
Together, the moves may help salve the sting that many here have felt after acquisitions of several hallmark local corporations, including Amoco Corp., Waste Management Inc. and Morton International Inc.
Also Thursday, Tenneco announced it lost $291 million, or $1.74 a diluted share, in the first quarter. The biggest culprit was an after-tax loss of $178 million, or $1.07 a share, on the sale of its containerboard business, renamed Packaging Corp. of America.
Because the split was long expected, the earnings probably caused the biggest ripple on Wall Street. Tenneco shares fell 69 cents on the New York Stock exchange, to $27.56.
While Tenneco said last July it was looking for a way to split its automotive and packaging operations, key details are yet to be decided. Most of the outstanding questions will be answered soon–probably within 30 days– as the company turns over information to bankers, debt rating agencies and the Internal Revenue Service, said Dana Mead, chairman and chief executive.
Neither company has named a chief executive. Even the names of the two corporations are up in the air.
“There’s a fair possibility one of the companies will keep the Tenneco name, and there’s a possibility both of them might,” Mead said in a telephone interview. There’s also a possibility both companies could end up with brand-new names, he said.
“What I don’t want is one of those non-names,” he said.
The company is analyzing brand names within the two units, and the extent to which the Tenneco name brings any quantifiable value to either, Mead said. A final name decision will be based on that analysis, he said.
“There’s obviously some mixed views inside the company,” Mead said.
Packaging operations have been linked more to brand names, like Hefty and OneZip, than to the Tenneco name, industry insiders say.
Automotive products are sold under the Walker and Monroe brand names, which are globally recognized.
Some financial issues, such as allocation of debt between the two companies, have yet to be resolved. Mead said the company is looking for ways both units can maximize cash to pay down debt. After that, remaining debt will be divided between the two companies.
There’s no doubt that the new packaging company will have investment-grade debt, Mead said. The likely ratings on the automotive side aren’t as clear, he said.
“It’ll be a high enough rating that it will have very good access to the capital markets,” he said. “That’s what we want to be sure is going to happen.”
Management lineups also haven’t been determined, although Mead will play some role for the short term.
Mark Frissora recently was named president of Tenneco Automotive, reporting to Mead as chief executive.
At Tenneco Packaging, Richard Wambold is executive vice president and Paul Griswold is senior vice president.
The assumption on Wall Street is that Frissora and Wambold will be named CEOs of their respective companies, with Mead perhaps remaining as chairman of both companies. Mead would not comment beyond confirming that he expects to remain involved for perhaps a year after the spinoff is complete.
“It takes some time to get used to being a stand-alone company,” he said, explaining why he expects to stay involved during a transition period, “then gradually phase out as these fellows take hold.”
Mead said he expects to help both companies set up their separate boards. But, noting that he will turn 64 in February, he said it’s not realistic to expect him to remain at the helm of either company for the long term.
What he’ll do after Tenneco is up in the air, he said.
“I frankly don’t have in mind a real role. I’ve been approached by a number of big international banking firms. I’ve been approached by a chairman of a university to teach leadership.”
The spinoff clearly is a turning point for Mead, but it is probably more so for the company. This split is the last step in unraveling what had been one of the nation’s major conglomerates.
Tenneco dates its slimming-down efforts from 1992, when Mead–then president and chief operating officer–took the helm at the troubled J.I. Case unit. But the effort really began in 1986, when Tenneco sold its oil and gas operations in a global auction.
The Case saga, however, is what defined Tenneco–and Mead. The Racine, Wis.-based unit ballooned in 1985 with acquisition of the agricultural-equipment operations of International Harvester Co.
Case was a drag on Tenneco earnings, so Mead took charge. By 1994 it was profitable enough for Tenneco to sell a huge chunk in an initial stock offering. In 1996 Tenneco sold the last of its stake in what is now known as Case Corp.
That year it also sold its Newport News Shipbuilding and chemical units. It even saw its pipeline unit–where Tenneco got its name and its start–merged into El Paso Energy.
In 1997 Tenneco targeted another lackluster unit, the containerboard division. That operation would be returned to profitability and sold, the company vowed. That happened in January with the sale to the private investment firm Madison Dearborn Partners Inc.
That left Tenneco with two disparate units–automotive parts and specialty packaging.
And now there is only automotive, and soon only one headquarters address–Lake Forest.
TENNECO INC.
EARNINGS DIGEST
In millions except for per-share data
1st Qtr. March 31 1999 1998
Automotive revenues 789 800
Specialty packaging 666 630
Paperboard 414 402
Other revenues (22) (23)
Extraordinary loss a336
Net income (loss) (291) 75
Per share (diluted) (1.74) 0.44
a–After-tax loss of $178 million, or $1.07 a share, on sale of
paperboard business; after-tax loss of $7 million, or 4 cents a share,
related to early retirement of debt; after-tax charge of $17 million,
or 10 cents a share, related to restructuring headquarters operations,
and after-tax charge of $134 million, or 80 cents a share, from change
in accounting principles.
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