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RJR Nabisco: - Some Genius Invented The Oreo. We're Just Living Off of The Inheritance
RJR Nabisco: - Some Genius Invented The Oreo. We're Just Living Off of The Inheritance
Discount Rate
As we discussed, the discount rate is the weighted average
cost of capital (WACC).
D
E
WACC
E ( rd )(1 t )
E ( re )
DE
DE
where t = tax rate,
E(rd) = expected cost of debt
D = amount of debt in capitalization
E(re) = expected cost of equity
E = amount of equity capitalization
Discount Rate
To calculate the WACC using 1989 figures under the three strategies:
5,204
12,790
Prebid :
(.09)(1 .34)
(.168) .137
5,204 12,790
5,204 12,790
11,186
4,202
Mgmt :
(.098)(1 .34)
(.250) .115
11,186 4,202
11,186 4,202
18capital
,932 structure changes over time, we
4115
NOTE:
since
the
need to recompute
KKR :
(.102)(1 .34)
(.330) the
.114
WACC each
year
to
reflect
the
change
in
capital
structure.
18,932 4115
18,932 4115
Prebid Mgmt
18,088
7,650
14,429
5,544
807
777
2,852
1,329
KKR
16,190
12,596
1,159
2,435
970
1,882
452
877
828
1,607
807
777
1,159
- Cap.Exp.
1,708
432
774
- Chg WC
80
41
79
0
901
12,680
13,861
3,500
5,413
+ Depr.
+ Asset
Sale
Net CF
1993
1994
1995
2985
3261
3555
2278
2507
2755
2855
3101
3364
1996
3887
3029
3651
1997
4246
3332
3970
1998
4575
3666
4319
Terminal Value
To estimate a terminal value, we need to make an assumption
about future growth after 1998.
If cash flows grow by 2.5% per year (and the WACC remains
constant), then for the pre-bid strategy:
4575(1 .025)
38,755
.146 .025
For the Management Group scenario:
PV (1998)
3666(1 .025)
PV (1998)
31,055
.146 .025
PV (1998)
4319(1 .025)
36,587
.146 .025
Terminal Value
Results will depend on the growth rate assumption.
Values in 1998 of cash flows for 1999 and beyond for
different assumptions are (Sensitivity Analysis):
Strategy
Pre-Bid
0%
31,336
Management
KKR
Growth Rate
2.5%
38,755
5%
50,039
25,110
31,055
40,097
29,582
36,587
47,239
Present Value
The present value of the cash flows for the prebid strategy
is (using the 2.5% growth rate assumption after 1998): ($
millions)
PV
901
1385
1856
2
3
1.137 (1 .139)
(1 .14)
...
4575 38,755
22,607
10
(1 .146)
Present Value
To figure out the value per share of RJR Nabisco to the
CURRENT shareholders, consider the pre-bid valuation:
Total Assets = 22,607
Current Debt = 5,204
Equity = 17,403
17,403
PerShare
70.34
247.4
Valuation
Estimates of the value per share under the alternatives
(again, using the 2.5% growth rate assumption):
Strategy
Total
Debt
Equity
Share Price
Prebid
Management
22,607
30,593
5204
5204
17,403
25,389
$70.34
$102.62
KKR
29,278
5204
24,074
$97.31
Sources of Value
The company is worth substantially more under either the
KKR or the Management Group plan.
There are smaller differences between the KKR value and the
management value.
The buyout plans propose to
increase debt
trim excesses
decrease capital expenditures
sell food assets
decrease operating profits
What Happened?
Per share bids:
MGMT
KKR
FB
Case (11/18)
$100
94
98-110
11/29/88
$101
106
103-115