Industry analysts said today that International Harvester Co. appears close to a deal to turn over its ailing farm-equipment business to Tenneco Inc. -- and might even pay Tenneco to take the business off its hands because of huge debts and pension-fund liabilities associated with the division.
There also was speculation about a possible alternative plan for a joint venture in farm equipment between IH and Tenneco's tractor-making subsidiary, J. I. Case.
Both IH and Tenneco-Case have scheduled meetings with dealers next week to inform them of some sort of new business arrangement. A Harvester spokesman declined comment on the situation; Tenneco officials could not be reached. But The Wall Street Journal reported that the messages sent to both companies' dealers promised "a dramatic development with far-reaching implications for the future."
"Obviously, they're getting close to some kind of agreement," said George S. Dahlman, an analyst at Piper Haffray & Hopwood in Minneapolis.
Any kind of Harvester-Tenneco deal would mark the beginning of a long-predicted consolidation of manufacturers of farm equipment, an industry suffering for the past several years from too few sales and too much high-priced manufacturing capacity. Even Harvester's chairman, Donald D. Lennox, has said that there must be "marriages" of farm equipment makers for the industry to operate efficiently and profitably.
"It's a situation where everybody has got too much capacity and something has got to give," said Eli Lustgarten, an analyst at Paine Webber.
Harvester is the nation's second-largest maker of farm equipment and Case is the second-largest maker of large tractors, so the combination would be a formidable challenger in the industry. Tenneco, which has far-reaching interests in petroleum and insurance, would have more resources to spend on strengthening the combined companies' operations. Tenneco has reportedly been frustrated by Case's poor performance recently and been interested in either beefing up the unit or selling it.
Harvester has been among the hardest-hit of the major agricultural implement manufacturers, losing hundreds of millions of dollars in recent years and teetering on the brink of bankruptcy for much of the period. The losses in farm equipment have only recently been offset by a profitable performance in its truck division, and between the two units the company is now just about breaking even. Still, IH officials have said they anticipate losing money on the farm-tractor business for the foreseeable future.
Capitulation in the farm-equipment field would be particularly wrenching for Harvester -- the company traces its origins to Cyrus McCormick's 19th-century invention of the mechanized reaper -- and for decades, IH was the symbol of modern American agricultural equipment. In recent years, however, its pre-eminent position has been usurped by John Deere & Co., the current industry leader.
By getting rid of or gaining a partner for the farm division, Harvester could concentrate on the more profitable truck-making business -- although analysts said costs of disposing of the tractor unit could be a drag on the remainder of the company for some time.
If Harvester does sell its tractor operations to the financially stronger Tenneco, it is unclear how the transaction would be structured, analysts said, and IH might wind up having to make some sort of payment to Tenneco.
That's because IH's operations are saddled with portions of the company's $1.3 billion in debt and $1.1 billion in unfunded pension liabilities that would have to be absorbed by an acquirer. Reportedly, earlier negotiations for a Tenneco acquisition of IH's farm-equipment business stumbled over those obligations. They could be offset, however, if IH can also transfer some of its $1.5 billion in tax-loss carryforward credits. Though it might seem absurd for Harvester to pay another company to take away the farm-equipment division, Lustgarten said, "That's the one that's killing you, so what price victory?"
"Harvester really doesn't have anything to offer from the positive side," Dahlman said. "It's a question of how much they can foist off on Tenneco."
Analysts suggested that it might make more sense for Harvester and Case to enter into a joint venture playing off the strengths of each company, with the two sharing the benefits. "Joint venturing is not impractical at all," Dahlman said. "It may be more practical, from financial logistics."
He said splitting the agricultural equipment division at IH away from the truck division "is sort of like separating Siamese twins" because of the complexity of the company's financial situation. And the results, he said, could be financially damaging to the surviving part of the company. "On the assumption that the International Harvester ag-equipment line is gone and goes to Tenneco, the real question for shareholders is what's left," Dahlman said. "There's the truck group, but how much of the sins of the past will the truck group have to take on?"