The Leveraged Buyout of RJR Nabisco In 1988, a war was launched for the control of RJR Nabisco. It ended at the end of the year when KKR won the bidding war with a $ 109 per share offer and took RJR Nabisco private. Before the details of the leveraged buyout (LBO) are discussed, it is important to understand what made RJR Nabisco so attractive. RJR Nabisco was a conglomerate company that was involved in mainly two industries. It had divisions in the tobacco and food industries.
In the tobacco division, RJR was the manufacturer of some very successful cigarettes. It also had some very popular brands in its food division such as the Oreo. Before the leveraged buyout war began, the company was not performing as well as it was expected to. Furthermore, according to the movie, “Barbarians at the gate”, RJR was supposed to launch a new type of smokeless cigarette. However, focus groups had demonstrated that the product was less than desirable. In addition, they had already spent more than $ 350M in research and development for this product. The management team was anticipating that the market would react negatively on the company’s stock price after the launch of the cigarette. Due to the fact that, Ross Johnson, the CEO of RJR Nabisco and other executives had access to information that the market had not yet received, they sought to evade the market reaction by taking the company private. By going private, the management could gain more freedom on the control of the company without being pressured by shareholders.
Thus, they did not have to be concerned about the stock price and could concentrate on the firm’s operations. Amongst the different strategies that they could have used, RJR was a perfect candidate for a LBO. First off, RJR had a stable cash flow from its divisions which was also sheltered from business cycles. 3 They also had low capital expenditures and debt and a lot of unused debt capacity. 3 Furthermore, using more debt would provide tax shields. 3 For these reasons, RJR Nabisco was very attractive for a LBO because it could mainly use its operating cash flows to pay down its debt.