Effet de levier

et LBO
History of the RJR Nabisco takeover
 History of the RJR Nabisco takeover
• On November 24th, 1988, the board of RJR Nabisco finally announced its
acceptance of a revised proposal from KKR, with $25bn ($109 per share).
KKR won the competitive process for the ownership and control of RJR
Nabisco, a victory that resulted in the largest corporate control transaction
in the US, opening the road for large corporate buyouts.
 History of the RJR Nabisco takeover
• 1985 – RJR Nabisco was formed in 1985 when Nabisco merged with RJ Reynolds tobacco. The CEO F.Ross Johnson, originally from
Canada, was known for a risky, bold decision making process inside the boardroom.
• 20th October 1988 – Johnson decided to take the company private and proposed a $17bn LBO. Company shares rose sharply on the news.
Sherson Lehman Hutton announced they would take the company private at $75/share.
• 26th October 1988 – KKR & Co. made an offer $20.4bn, but the deal was rejected. Salomon Brothers, Forstmann Little, Shearson Lehman
Hutton, Goldman Sachs, First Boston, Merrill Lynch, Morgan Stanley, and more are all trying to get in on the action. A few days later, RJR
Nabisco gave KKR confidential financial data about its operations.
• 2nd November 1988 – KKR and RJR Nabisco tentatively agreed to join forces, but just after one day, the agreement failed. After that, RJR
Nabisco upped the ante by making a $92/share offer (i.e. $20.9bn).
• 18th November 1988 – Fist Boston put together a deal. Working with the Pritzker family in Chicago, offering between $23.8bn and $26.bn.
• 29th November 1988 – Management offered $22.9bn, KKR offered $24bn and First Boston offered $23.38 to $26.1bn. The stock price
jumped to $90.88.
• 30th November 1988 – Finally, the company went to KKR for $24.9bn or $109 a share. Mr Johnson received $53m from the buyout, $23m
after taxes.
Deal overview:
 Deal overview:
• The RJR Nabisco transaction warrants particular attention. Not only is it the largest
LBO on record, but it also features a particularly wide range of sophisticated players, a
complex set of innovative financial instruments, and a challenging valuation process.
• Successful LBOs are generally characterized by both low business risk and moderate
growth. RJR’s unlevered beta was 0.69, which means the firm was relatively
insensitive to market-wide fluctuations. Although the growth rates of tobacco and food
were 9.8% and 3.5% respectively, most analysts had forecast a slower long-term
growth rate in both units. Together with the firm’s little capital investment requirement
and low debt levels, RJR Nabisco was a particularly attractive LBO candidate.
 The leveraged buyout
• Ross Johnson was the President and CEO of RJR Nabisco at the time of the leveraged buyout and Henry
Kravis was the managing partner at Kohlberg Kravis Roberts & Co. The leveraged buyout was in the
amount of $25 billion, and the battle for control took place between October and November 1988.
• Although KKR eventually took control of RJR Nabisco, RJR management and Shearson Lehman
Hutton had originally announced that they would take RJR Nabisco private at $75 per share. A fierce
series of negotiations and proposals ensued which involved nearly all of the major private equity players
of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers, First Boston, Wasserstein
Perella & Co., Forstmann Little, Shearson Lehman Hutton, and Merrill Lynch. Once put in play
by Shearson Lehman Hutton and RJR management, almost every major Wall Street firm involved in
M&A launched frenzied, literal last-minute bids in a fog of incomplete or misleading information.
 The leveraged buyout
• KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price that
enabled it to proceed without the approval of RJR Nabisco's management. RJR's management
team, working with Shearson Lehman Hutton and Salomon Brothers, submitted a bid of $112, a
figure they felt certain would enable it to outflank any response by Kravis. KKR's final bid of
$109, while a lower dollar figure, was ultimately accepted by the board of directors. It was
accepted because KKR's offer was guaranteed whereas management's lacked a "reset", meaning
that the final share price might have been lower than their professed $112 per share.
Additionally, many in RJR's board of directors had grown concerned at recent disclosures of
Johnson's unprecedented golden parachute deal. Time Magazine featured Johnson on the cover
of its December 1988 issue along with the headline "A Game of Greed: This man could pocket
$100 million from the largest corporate takeover in history. Has the buyout craze gone too far?".
 The leveraged buyout
• KKR's offer was welcomed by the board, and, to some observers, it
appeared that their elevation of the reset issue as a deal-breaker in KKR's
favor was little more than an excuse to reject Johnson's higher payout of
$112 per share. Johnson received compensation worth more than $60
million from the buyout, then left in February 1989. In March 1989, Louis
V. Gerstner of American Express became the new head of RJR Nabisco.
 After the KKR buyout
On April 27, 1989, RJR Nabisco announced it would move its headquarters to the New York City area.
As a result of the acquisition, RJR Nabisco divested the following divisions:
• Nabisco's UK operations (including Smith's and Walkers), Belin of France, and Saiwa of Italy were
sold to BSN. Smith's and Walkers were swiftly resold to PepsiCo.
• Chun King was sold to Yeo Hiap Seng.
• Associated Biscuits International (consisting of 38% of India's Britannia and 40% of Pakistan's English
Biscuit Manufacturers) to Britannia Industries.
• Fresh Del Monte Produce was sold to Polly Pec.
• Del Monte Foods was sold to Merrill Lynch, Citicorp Venture Capital, and Kikkoman. Del Monte's
Asia operations (outside the Philippines) were separately sold to Kikkoman.
• The company's 20% stake in ESPN Inc. was sold to Hearst Communications.
 After the KKR buyout
• On March 21, 1991, RJR Nabisco Holdings Corp. became a publicly traded
stock. In March 1999, RJR Nabisco announced the sale of the international
division of R. J. Reynolds Tobacco, and in June of that year, the company
sold the remainder of R. J. Reynolds Tobacco to stockholders. The parent
company became Nabisco Group Holdings and owned 80.5 percent of
Nabisco Holdings. In 2000, Philip Morris bought Nabisco Holdings. Soon
after that, R. J. Reynolds Tobacco Holdings, Inc., first traded in June 1999,
announced the acquisition of Nabisco Group Holdings. The deal was
completed in December 2000.
 How did KKR win if its offer was low?
• By traditional standards, RJR management should have won the bidding war. Its offer, $112 a share, was higher
than KKR’s by nearly $700m, its cash portion of the offer (i.e. $84) was higher than KKR’s ($81), its members
were all industry experts with an intimate knowledge of the company and management was on good terms with
the board members. Nevertheless, when the bidding ended, traditional factors did not determine the winner. The
management group lost.
 Why?
Here the following factors had led to the success of KKR’s lower bid:
• The break-up factor – KKR promised to keep the tobacco and most of the food business intact, which
matched the board’s will to keep the company as intact as possible. While KKR promised to keep the
tobacco and most of the food business intact, the management group planned to keep only the tobacco
business. Indeed, KKR specified that it would sell only $5bn-$6bn of RJR assets in the near future,
while the management group planned to sell the whole food business (estimated at $13bn).
• The equity factor: The board’s five person committee wanted to provide existing share-holders with an
option to participate in the buyout and thus share in any future KKR profits from the transaction. The
desire was to leave some portion of the company’s stock in public hands. While KKR proposed to
distribute 25% of the equity in the future company to existing shareholders, the management grup offer
included only 15%.
 Why?
• Financing structure: Based on an analysis performed by the advisors to the board’s committee,
KKR was offering $500m more equity than the management group, which again accommodated
the board’s objective of maximizing current shareholders’ participation in future profits.
• Post-LBO leadership: The intensive bidding war affected all parties involved (including
management, employees, communities and the bidders themselves). During the bidding period, the
uncertainty was high and business was affected. In the interest of restoring stability, the board’s
special committee assessed each offer in terms of its effects on RJR’s identity and culture. KKR
quickly read the board’s mind and announced its plan to install J. Paul Sticht as the new CEO (vs.
management which proposed Johnson to continue as CEO). For various reasons (i.e. most
expensive fleet of corporate jets and poor public relation) the board associated MR. Johnson’s
group with greed, lavish spending and insensitivity to employee and community needs.
 The assessment of the deal
• The board assessed each offer in terms of its effects on RJR’s identity and
culture, and finally placed more preference on KKR. KKR was able to
recognise that financial factors, as well as the acquiring group’s goodwill,
would play a decisive role in the game.
 Ressource
• The New York Times (1988) 
https://www.nytimes.com/1988/12/02/business/history-of-the-rjr-nabisco-takeover.html
• Duke Law Journal (1989) 
https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1278&context=faculty_scholarship
• Financial Analysts Journal (1991) https://homepage.univie.ac.at/youchang.wu/RJB.pdf
• Fortune Magazine (2003) 
http://archive.fortune.com/magazines/fortune/fortune_archive/2003/10/13/350888/index.htm
• Business Insider (2012) 
https://www.businessinsider.com/rjr-nabisco-lbo-private-equity-deal-2012-1?IR=T#meanwhile-pe-firm-
forstmann-little-played-with-entering-the-race-but-ultimately-decided-not-to-which-caused-the-stock-to
-plummet-9
• Investopedia (2018) 
https://www.investopedia.com/articles/stocks/09/corporate-kleptocracy-rjr-nabisco.asp