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DURACELL LOOKS ABROAD FOR MORE JUICE
Most chief executives fret over their stock offerings, but C. Robert Kidder, the CEO of Duracell International Inc., was especially antsy when his company went public on May 2, 1991. And with good reason. A leveraged buyout led by Kohlberg Kravis Roberts & Co. three years before saddled Duracell with $1.6 billion in debt. The interest payments -- $226 million in 1990 alone -- were eating up profits. A successful initial public offering was the quickest way the battery maker could get back into the black.
Nowadays, Kidder is resting easier. Last year's ipo, combined with a subsequent offering five months later, raised $563 million, enough money to reduce Duracell's debt load to roughly $1 billion. Even better, Duracell finally began making money. After three straight years of disappointing results, Duracell reported a net profit of $128 million in the fiscal year ended in June. Merrill Lynch, Pierce, Fenner & Smith Inc. analyst Deepak Raj expects profits to soar 37% this year, to $175 million, on sales of $1.8 billion, up 11%.
CRAMPED. With his balance sheet looking better, Kidder now has more time to focus on the daunting task of expanding Duracell's market share. The company's famed copper-top batteries, which supply the juice for everything from cameras to smoke detectors, command a 79% share of the $3.2 billion U.S. retail market for consumer alkaline batteries. But that dominance has left the company little room to grow. After improving every year since 1989, sales growth is slowing. In response, the company, based in Bethel, Conn., is searching for new markets overseas. At home, Kidder is pressing his researchers to develop a new generation of batteries. One promising product: a long-lasting, rechargeable battery for such energy-thirsty products as laptop computers.
Whatever Duracell's current challenges, its future appears a lot more certain than it did in 1987. At the time, Kraft Inc. was eager to spin off its only nonfood business, in part to raise cash and fend off a possible takeover bid. And that's when KKR stepped forward. Tapping into its network of institutional investors, KKR came up with $365 million in cash and a plan to raise the rest of the $1.86 billion buyout price by issuing junk bonds. Kidder and his management team contributed $10 million to the deal.
The 48-year-old Kidder, who has been CEO since 1984, insists that the partnership with KKR has been smooth. After the 1988 buyout, KKR virtually took charge of the company, running everything from accounting to corporate planning. But Wade Lewis, Duracell's chief financial officer, says that KKR's involvement in day-to-day operations has lessened considerably, thanks largely to Duracell's improving balance sheet: Long-term debt is now down to a manageable $724 million (chart).
WINDFALL? That doesn't mean that KKR doesn't make its influence felt. The firm still owns 51% of Duracell's stock and holds five of its nine board seats. KKR won't talk in any detail about its relationship with Duracell, but George Roberts, a KKR principal, says Kidder and other top managers "consistently deliver on the ambitious goals they set for themselves." Duracell has certainly delivered for KKR. The firm's stake has a current market value of more than $2 billion. And while many Wall Street analysts expect that KKR will one day book a huge windfall by selling its shares, few expect it to exit Duracell in the near future.
Keeping Duracell growing -- and its share price rising -- won't be easy, however. True, revenue from its alkaline battery sales in the U.S. rose a healthy 7%, to $821 million, in the fiscal year ended June 30. But much of that gain came from higher prices and a boost in sales after Duracell included a battery-tester device as part of its packaging in 1991. Marketing studies had shown that consumers wanted more than a freshness date on their batteries. Given the maturity of the battery market and Duracell's huge market share, however, U.S. sales growth is expected to slow to 5% in the current year, says analyst Jane Gilday of Tucker Anthony Inc., a securities firm based in Boston.
That means Duracell will have to do better overseas, where its growth has been lackluster. Kidder says Duracell can achieve better results by pushing into virgin markets in Eastern Europe. Earlier this year, it opened a sales office in Budapest. He also wants to popularize the brand in Asia. Duracell is teaming with a local competitor in a joint sales venture in Indonesia later this year. As a result of Kidder's push abroad, Gilday reckons that foreign sales will account for more than half of Duracell's revenues this year, compared with one-third in fiscal 1992.
CLEANER WASTE? Kidder, who has a degree in industrial engineering from the University of Michigan, is also betting that future growth is likely to come as much from new products as new markets. Duracell is developing a new generation of longer-lasting rechargeable batteries for portable consumer electronics. To help achieve his vision of a "cordless Duracell home," Kidder reached an agreement in January with international competitors, such as Toshiba Battery Co. of Japan and Germany's Varta Batterie, to develop standard battery packs for camcorders, cellular phones, and laptop computers that will use the new fickel metal hydride battery. The battery has up to 40% more life than existing nickel-cadmium batteries.
Duracell plans to roll out the new battery next year. Japan's Fujitsu Ltd. announced in October that it would use the Duracell batteries in its next generation of cellular phones. But it's still too early to say whether the battery will catch on with other manufacturers. "There's no consensus that nickel metal hydride is the way to go," says Erin Craig, corporate environmental programs manager for Apple Computer Inc. She cautions that the nickel metal hydride battery could present environmental problems.
That kind of skepticism is bound to be a bit unnerving. But Duracell's chief says worrying comes with the territory. And keeping his copper-top brand on top, Kidder confesses, is one challenge he's happy to be antsy about.Julie Tilsner in Bethel, Conn.