Financially troubled International Harvester Co., which has been making equipment to plow, till and harvest America's soil since founder Cyrus H. McCormick invented the reaper in 1831, yesterday said it plans to sell its farm-equipment business to Tenneco Inc. for $430 million in cash and stock.
The sale will leave Chicago-based Harvester, whose red-painted tractors and combines have been fixtures on the nation's farms for more than 150 years, solely as a maker of large trucks and saddled with more than $2 billion worth of debts and pension obligations, partly attributable to the divested business.
Tenneco, which makes J. I. Case tractors, will take over IH's position as the nation's second-largest maker of farm equipment.
"The decision to sell was a monumental one," Harvester Chairman Donald D. Lennox told a press conference in Chicago. "Not because the right decision wasn't made at this time, but because International Harvester is losing the facet of business on which it was built.
"It was a very difficult decision to make, but it was the only decision possible," Lennox said. "With no prospect for an immediate upturn in the farm-equipment business, International Harvester had to move decisively to protect the interests of its various constituencies."
Analysts said the sale of Harvester's farm-equipment business to Tenneco was all but inevitable given the depressed state of the nation's farm economy and the consequently poor market for farm equipment. Worried about high interest rates and low crop prices, farmers have been putting off buying new equipment for the past five years, all but plowing under the farm-equipment industry.
Equipment manufacturers, and Harvester most of all, have been struggling under huge debts and unneeded factory capacity, losing millions of dollars along the way. "You've had a farm-equipment industry in which all the major manufacturers were hemorrhaging," said Eli Lustgarten, an analyst at Paine Webber Mitchell Hutchins Inc. "You had to stop the hemorrhaging."
Harvester alone has lost more than $2 billion in the past five years, and has teetered on the edge of bankruptcy for most of the period. The company has shed businesses, closed a score of plants and cut worldwide employment by two-thirds in an attempt to survive.
The planned sale of the IH farm-equipment line will idle still more workers. Tenneco is not buying IH's huge Farmall tractor and combine plant in Rock Island, Ill., the largest employer in that already hard-hit factory town. Combine production, and some of the manufacturing equipment from the plant, will be transferred to Case's factory in Racine, Wisc. That shift alone illustrates the industry's problems: The Farmall plant had a capacity to make 37,000 tractors a year; the Racine plant can make 15,000 tractors annually. Tenneco officials said they expect the Racine plant will be enough to handle the combined demand for the two companies.
Harvester's combine plant in East Moline, Ill., adjacent to Rock Island, will remain open as a Case plant. Case will purchase IH's farm-implement plant in Hamilton, Ont.; an engineering facility in Hinsdale, Ill., and IH's British subsidiary, including a plant in Doncaster, England. Tenneco will purchase IH farm-equipment operations in Germany, France and Denmark.
Case also will gain Harvester's highly regarded network of dealers. Industry analysts said it is too early to measure the full effects of the planned sale, but they estimated that about 15 percent of the combined roster of Case and Harvester dealers would be dropped. "I'm sure they have a lot of dealers they'll have to eliminate over time," said one analyst. Harvester and Case have scheduled mass dealer meetings for Wednesday to explain the transaction.
Analysts said the takeover will make Case a major competitor in the farm-equipment business by expanding its lines of large tractors and industrial equipment into a full line of agricultural equipment. The industry leader, John Deere & Co., said in a statement that the Tenneco buyout of Harvester's farm group is a "very interesting development" that Deere is evaluating. "The farm and industrial-equipment industries always have been highly competitive, and our planning is based on the assumption that this will continue."
Tenneco officials, who reportedly had been considering selling Case because of disappointing results, said they believe that the acquisition will strengthen Case and put it in an advantageous position to benefit from any future recovery of the farm-equipment business.
"Our action removes a cloud of uncertainty that has been hanging over these two companies," Tenneco Chairman James L. Ketelson said. "Tenneco's financial strength enables us to affirm our commitment to the future of the business and to the owners of both Harvester and Case equipment.
"We are enthusiastic about our future with the strong team we've put together," Ketelson said. "The combination of tractors, combines and implements and the dealer networks create a healthy nationwide sales, parts and service organization that builds our competitive stature and allows us to be profitable, even in today's markets."
For Harvester, the proposed sale would remove its most pressing financial problem, but leave several long-term worries, analysts said. As a truck maker shed of the money-losing farm-equipment business, Harvester can expect to be instantly profitable, they said. But the company still faces $1 billion in unfunded pension liabilities and $1.4 billion in debts. Tenneco, which had been expected by some analysts to assume some of the debts and pension liabilities, only took the $75 million in pension liabilities associated with the workers at the plants it acquired.
"My main concern is what's left of Harvester," said George Dahlman, an analyst at Piper Jaffray & Hopwood of Minneapolis. "It's a highly leveraged truck manufacturer."
Harvester is expected to use the $260 million in cash it receives from Tenneco, as well as some cash it has on hand, to reduce its debt load. Some analysts said Harvester, as a truck maker, might now be an attractive acquisition candidate, especially because the company has $1.5 billion in tax-loss carryforwards to offer an acquirer.
Analysts agreed yesterday that the company was probably better off without the farm-equipment line. "They'll be making money," Lustgarten said. "It's sure going to be better than what it was."