Rjb-a Case Study

RJR Nabisco: A Case Study of a Complex Leveraged Buyout
Michel, Allen; Shaked, Israel
Financial Analysts Journal; Sep/Oct 1991; 47, 5; ABI/INFORM Global pg. 15

                by Allen Michel and Israel Shaked

                    RJR Nabisco: A Case Study of a Complex Leveraged Buyout

                Several features of RJR Nabisco made it a particularly attractive LBO candidate. Its operations exhibited moderate and consistent growth, required little capital investment and carried low debt levels. Its problems—a declining return on assets and falling inventory turnover—appeared fixable. And it offered significant break-up value.
                  Valuing RJR's equity at the time of the LBO requires detailed knowledge of the company's operations and extensive number crunching. The analysis is obviously quite dependent on the assumptions made about cash flow in the post-LBO period, as well as the long-term, steady-state growth rate. Nevertheless, the figures suggest that, even assuming a high, 5 per cent level of steady-state growth, RJR's cash flows would have to grow at a rate of at least 18 per cent per year to justify KKR's bid of $109 per share.
                  RJR's board played a prominent role in the bidding process. By setting the bidding rules, the board successfully minimized the possibility of collusion and thus increased potential gains to stakeholders. The decision to accept KKR's offer over RJR management's higher bid appears to reflect the board's concern for employees and existing shareholders.

OTH THE POPULAR press and the academic press have devoted extensive coverage to leveraged buyouts, but neither has devoted much attention to analyzing the features of a specific LBO.1 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...