THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Tuesday, September 3, 1996 TAG: 9608310351
SECTION: BUSINESS PAGE: D2 EDITION: FINAL
SOURCE: BLOOMBERG BUSINESS NEWS
LENGTH: 64 lines
Tenneco Inc. plans to use a $610 million payment it receives by the end of this year from divesting Newport News Shipbuilding to cut debt and prepare for acquisitions aimed at tripling its income by 2000.
For Newport News, things aren't quite as bright. The company is going to have to borrow the money, most of it at junk-bond rates, to make the payment. The Virginia shipbuilder will begin life as an independent company with a 3-to-1 debt to equity ratio, about double the average for defense companies.
Newport News' chief financial officer, David Anderson, said he's not concerned by the debt load.
``Cash is the key indicator'' to measure the company's balance sheet, not the debt ratio, he said. ``We think (credit agencies) will look at the cash-flow-generating ability of the business.''
The shipyard has an order backlog of $4 billion. It's the only U.S. maker of aircraft carriers, which take more than five years to build and cost more than $5 billion, and one of two shipyards producing nuclear-powered submarines. General Dynamics Corp.'s Electric Boat unit is the other.
Last week, Tenneco submitted to the Securities and Exchange Commission details of the Newport News spinoff and the sale of its energy operations to El Paso Energy Corp.
Terms of those transactions call for Newport News to pay $610 million to Tenneco that will be used to pay short-term debt, and for El Paso Energy to assume $3.3 billion of Tenneco Inc. debt and other liabilities.
When its restructuring is completed by year's end, Tenneco, which had revenue of about $9 billion and debt of $5 billion at the end of 1995, will have more than $5.5 billion in revenue and $2 billion in debt.
The new Tenneco will be automotive businesses including Monroe shock absorbers and Walker exhaust systems, and packaging products such as Hefty trash bags and E-Z Foil cookware.
Tenneco Chairman Dana Mead has said that the company expects faster growth in its auto and packaging than it could expect in shipbuilding or energy.
Reducing its debt will give Tenneco a strong balance sheet that will allow it to implement a plan aimed at ``doubling revenues and tripling income'' by 2000, spokesman Mike Bazinet said.
That's to be done ``by a combination of acquisitions, internal growth and continued improvement in operating performance,'' he added. He wasn't more specific.
Joel Tiss, an analyst at Lehman Brothers, said the new Tenneco will generate ``about $1 billion in free cash flow'' by 1998. That, and a strong balance sheet, will give Tenneco ``about $2 billion in purchasing power'' for acquisitions, he said.
The acquisitions have already begun. On Monday, Tenneco completed its $310 million purchase of Amoco Corp.'s foam products businesses, which had $288 million in sales last year.
While Tenneco is heading towards a better-than-average balance sheet, Newport News faces big debt. Newport News will borrow $200 million from banks, and either sell $400 million worth of bonds by November or arrange additional bank loans in the same amount.
Either way, Newport News will start out with $610 million in debt and $203 million worth of equity on its balance sheet. That's one reason company officials believe the company's debt securities will probably receive a ``junk'' rating from credit agencies.
Newport News is now working on a new aircraft carrier and will build two submarines by 2002. It's also overhauling carriers now in service and building commercial tankers. by CNB