RJR Nabisco Case Prepared by Robert M. Bushman

Transcription

1 RJR Nabisco Case Prepared by Robert M. Bushman Overview This case examines the leveraged buy-out of RJR Nabisco, Inc. by Kohlberg Kravis Roberts & Co. (KKR). The deal was implemented by KKR through a system of corporate shells, where the capital structure of the deal (i.e., the deal financing) is distributed across these shells. Think of this system of corporate shells as the acquisition vehicle, the organization that is doing the deal. This case considers the question of why KKR chose this structure to execute the transaction. The data for the case is taken from RJR Holdings Corp. s Proxy Statement dated April 15, The deal is structured to be carried out in two stages. The first stage is termed the Tender Offer. At the time of the April 15 th proxy statement, the tender offer stage has already been completed, resulting in KKR (through its acquisition vehicle) owning a little more than 74% of RJR Nabisco s outstanding common stock. The second stage, termed the Merger, is designed to acquire the remaining 26% of RJR Nabisco s outstanding common stock. KKR was the ultimate winner of a contentious battle for RJR Nabisco after competing against an array of other bidders. There were many offers and counter-offers over the course of the process. The deal terms described below are the final, winning terms offered by KKR. To put the KKR offer in perspective, prior to RJR Nabisco being put into play as an acquisition candidate, the market capitalization of RJRN s equity on the NYSE was $12 billion. Analysis Questions: 1. What package of consideration does each share of RJR Nabisco receive in the deal? 2. Approximately how much did KKR pay for RJR Nabisco all in? Compare this amount with the market capitalization of RJRN s equity on the NYSE just prior to RJRN being put into play as an acquisition candidate. What does the difference between these two amounts imply about the challenges facing KKR in pulling off a successful deal? What does the difference say about the riskiness of the deal? What does the difference say about how RJRN was being run prior to the deal? 3. Refer to the section entitled Purpose and Structure of the Transaction. Examine the system of corporate shells through which the deal will be executed. What is the relationship of these corporate shells to each other? Which of the securities issued to finance the deal has the highest risk of not being paid off? 4. KKR could have chosen to use a single corporate shell to carry out the transaction. This would have been simpler and likely less costly in terms of transaction costs. Why do you think KKR instead used four corporate shells to carry out the transaction? 5. Refer to the pro-forma balance sheet shown below on pages 5 and 6. Why is Group Preferred Stock (GPS) shown as equity on Group's balance sheet, but as Minority Interest for Holdings? 1

2 RJR HOLDINGS CORP.: Proxy Statement, April 15, 1989 At the Special Meeting, the Company's stockholders will be asked to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of November 30, 1988 and amended as of April 3, 1989 to incorporate the final terms of the securities to be issued to stockholders of RJR Nabisco (the Company) there under. The Merger is the second and final step in the acquisition of the Company pursuant to the terms of the Merger Agreement. The first step was a tender offer (the "Tender Offer") in which Acquisition purchased (a) 165,509,015 shares of Common Stock (approximately 74% of the unrestricted s shares of Common Stock outstanding prior to the Tender Offer) at $109 per share in cash and (b) 1,196,652 shares of Preferred Stock (approximately 96% of the shares of Preferred Stock Outstanding prior to the Tender Offer) at $108 per share in cash. Under the Tender Offer, stockholders tendered over 98% of the unrestricted shares of Common Stock outstanding prior to the Tender Offer. Deal Terms Offered to RJR Nabisco s common shareholders by KKR (Kohlberg Kravis Roberts & Co.) KKR offers $109 per share of RJR Nabisco Common Stock, consisting on a per share basis of $81 in cash $18 of Group Preferred Stock and $10 of Senior Converting Debentures $109 They also offer $108 per share in cash per share of Preferred Stock. The deal proceeds in two stages as follows: I. Tender Offer: In this stage the KKR acquisition vehicle purchased 74% of RJR's $109 in cash and 96% of the preferred at $108 per share in cash. This implies a total cash outlay in the tender offer of $18,169 computed as: M shares of common x $109 = $18,040 and 1.2 M preferred shares x $108 = $129. Thus after the tender offer they hold all the preferred and 74% of the common. II. Merger: In this stage each remaining RJR Nabisco share (26%) gets: shares of Group Preferred Stock, and 2. $31.14 principal amount of Senior Converting Debentures. Note on Group Preferred Stock: The shares of Group Preferred Stock are exchangeable, solely at the option of Group into Subordinated Exchange Debentures Due 2007 of Group. The shares of Group Preferred Stock are not exchangeable or convertible at the option of the holder thereof. Given that the Group Preferred Stock is convertible into debt at the option of the issuer, it is really more like debt than equity. (See the graphic on the following page to see how the corporation Group fits into the acquisition vehicle structure). 2

3 The deal financing is as follows: Capital's Debt... $17,675 Group Preferred Stock... 4,067 Holdings Senior Converting Debt... 2,259 Holdings Equity Investment... 1,500 Cash From RJR (approximately) Purchase Price... $26,078 Purpose and Structure of the Transaction The Original Offer was made as the first step in the acquisition by Holdings of the entire equity interest in RJR Nabisco (the Company). The Original Offer was amended pursuant to the Merger Agreement to provide for the acquisition of up to 165,509,015 shares of Common Stock (approximately 74% of the unrestricted shares of Common Stock outstanding prior to the Tender Offer) at $109 per share and any and all shares of Preferred Stock at $108 per share, in each case net to the seller in cash. The purpose of the Merger is for Holdings and its subsidiaries to acquire all the remaining outstanding shares of Common Stock and Preferred Stock not tendered and purchased in the Tender Offer. The Transaction was structured as a tender offer followed by a merger in order to provide stockholders of the Company with an expedited opportunity to receive the cash portion of the Final Proposal. The form and amount of consideration to be received by stockholders in the Tender Offer and the Merger, as well as the number of shares of Common Stock tendered for in the Tender Offer, was the result of arm's length negotiations between the representatives of the Company and KKR. Transaction Structure The chart set forth of below summarizes the structure of the Transaction. The amounts on the right side of the picture represent the deal financing. 3

4 Holdings Holdings is a newly formed Delaware corporation organized by KKR in connection with the Transaction. Approximately 94% of the issued and outstanding shares of Holdings Common Stock is owned by limited partnerships of which KKR is a general partner with the remainder beneficially owned by Drexel, Burnham and Lambert and Merrill Lynch &Co. Group Group is a newly formed Delaware corporation organized by Holdings in connection with the Transaction. All of the issued and outstanding shares of Group common stock are currently owned by Holdings. Capital Capital is a newly formed Delaware corporation organized by Holdings in connection with the Transaction. All of the issued and outstanding shares of Capital common stock are currently owned by Group. Acquisition Acquisition is a newly formed Delaware corporation organized by Holdings in connection with the Transaction. Acquisition's existence will be transitory, and in the Merger, Acquisition will merge with and into the Company, which will be the Surviving Corporation in the Merger. All of the issued and outstanding shares of Acquisition common stock are currently owned by Capital. 4

5 Selected Pro Forma Financial Data The following pro forma condensed consolidated balance sheets of Holdings and Group (the "Pro Forma Statements") were prepared to illustrate the estimated effects of the Tender Offer, the Merger and the Financing and certain refinancing and the application of the proceeds thereof as if they had occurred for balance sheet presentation purposes as of December 31, The Pro Forma Statements assume that the Tender Offer and Merger closings occurred on the same date. The Merger will be accounted for under the purchase method of accounting. The total purchase cost of approximately $26.1 billion will be allocated to the assets of Holdings and Group based upon their respective fair values. 5

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