Case Study: RJR Nabisco
March 22, 2015
The RJR Nabisco Leveraged Buyout (LBO) case study analyzes the history prior to the LBO and the post LBO corporate organization. RJR Nabisco was not performing well prior to the LBO. Financial analysis’s also implies that the shareholders of RJR Nabisco profited from Kohlberg Kravis & Roberts winning LBO bid. (Gaughan).
To define a leveraged buyout or LBO, it is “a financial procedure used by a many business entities, including the management of a corporation or outside groups, such as other corporations, partnerships, individuals, or investment groups” (Gaughan). An LBO is the acquisition of another company where ...view middle of the document...
As of 2006 the RJR Nabisco LBO was the biggest LBO ever recorded. The RJR Nabisco Corporation was formed due to a merger between RJ Reynolds Tobacco Company and Nabisco Food Corporation. RJR Nabisco was not performing well before the LBO. There were many various items that made RJR Nabisco attractive as an LBO candidate. RJR Nabisco operations did forecast modest and steady growth that required very little capital investment which also had very low debt levels. However, RJR’s return on assets were declining and its inventory turnover was low. The cash flows from the tobacco portion of the business made it constant and foreseeable which did not vary.
RJR was the manufacture for a very popular brand in its food division: Oreo. Some demonstrations showed that the product would not succeed and consumers didn’t care much about the product. One major factor, RJR Nabisco had already spent over $350 million in research and development for manufacturing of a new tobacco product. RJR Nabisco did anticipate that the corporation may receive a negative response on the overall stock price with the introduction of a new cigarette product. The mixture of high valued products from tobacco and the food group gave the company a high breakup value which Smith Barney estimated to be around $85-$92 per share range compared with the $56 stock price just prior to the initial buyout offer” (Gaughan).
In 1998, this lead to numerous enterprises going head-to-head to take control of RJR Nabisco. After many series of biding, it ended with Kohlberg Kravis & Roberts (KKR). KKR won a bidding war with $109 per share offer and which moved RJR Nabisco to a private corporation. Some factors were taken into consideration during the process to decide how RJR Nabisco will continue to be intact and will have some public share owners. Part of the new plan in the beginning was to sell part of RJR Nabisco’s food segment as this part of the business was undervalued in its market. Ross Johnson, CEO for RJR Nabisco at that time, as well as other upper executives had knowledge to information which the market had not yet received, and therefore decided to take company privately to avoid negative market reaction. Additionally, going private with RJR Nabisco, management would have more control over the company...