$17 Billion Deal for RJR Nabisco Told : Officers of Tobacco-Food Firm Plan to Propose Biggest Buyout in History

Times Staff Writer

In what would be the largest corporate purchase in history, executives of RJR Nabisco Corp.--the consumer products behemoth--announced a proposal Thursday to buy their own company for $17 billion.

The move stunned Wall Street, sent the stock market soaring and shocked the nation’s food industry, which has been racked by one mammoth buyout proposal after another throughout October.

RJR Nabisco, formed only three years ago when R. J. Reynolds Tobacco Co. bought Nabisco for $5.2 billion, sells cookies, crackers, cigarettes and other products found on virtually every aisle of the supermarket.

They include Oreo cookies, Ritz crackers, Planters peanuts, Del Monte canned fruits and vegetables and Winston, Salem and Camel cigarettes.


Need Financial Partner

The company executives stopped short of a formal bid for the Atlanta-based company in their announcement Thursday. The executives said they plan to seek a financial partner and then proceed with an offer, which they put at $75 a share, or $17 billion.

“I’m awed and amazed,” said Ronald Morrow, an analyst with Smith Barney, Harris Upham & Co. in New York of the bid, which some experts expect could ultimately rise to $22 billion. He added that the proposed $75-a-share offer seemed low in light of the company’s robust cash flow.

RJR Nabisco announced the electrifying bid just three days after its chief rival, Philip Morris Cos., made an $11.5-billion bid to take over Kraft Inc.--the second biggest merger attempt ever.


The biggest merger is the 1984 purchase of Gulf Oil by Chevron for $13.2 billion--a deal that would be dwarfed by the RJR Nabisco proposal.

The RJR Nabisco managers seemed to be testing the limits of a transaction known as a leveraged buyout, Wall Street analysts said. In this kind of deal, buyers take on huge amounts of debt to make their purchase. The debt often takes the form of high-risk, high-yield “junk bonds,” backed by the target company’s assets.

Such buyouts are often controversial because the heavy debt burden often forces the new owners to sell parts of the company to pay off debts and to lay off workers to cut costs.

RJR Nabisco is currently a public company, with stockholders owning the firm and with its shares traded on the New York Stock Exchange.

In a leveraged buyout, a company is said to “go private,” with managers answering to a much smaller number of owners and with far less disclosure of profits and losses required by the government. In some cases, proponents say, this gives a firm’s management wider latitude to make strategic decisions and a greater stake in the outcome.

Yet, although offering the potential of immense profits to the buyers, there is little evidence that the financial maneuverings result in a more stable company, according to experts interviewed Thursday.

“RJR is worth more with a junk balance sheet than with a sound one,” maintained Louis Lowenstein, professor of finance and law at Columbia University. “That’s the reality out there.”

It was not clear whether the surprise offer would further stir the financial world and attract new suitors to RJR Nabisco. The firm disclosed Thursday that it would use Dillon Read & Co. and Lazard Freres & Co. as financial advisers. The management group has employed the investment firm of Shearson Lehman Hutton.


Shares Soar $21

In trading on the New York Stock Exchange, shares of RJR Nabisco soared $21.375 to close at $77.25 Thursday after word spread of the proposed purchase.

The possible deal galvanized what has been a sluggish stock market, with the Dow Jones industrial average soaring 43.92 to close at 2181.19 after plunging 22.58 during Wednesday’s anniversary of the Oct. 19, 1987, stock market crash.

The proposed deal was the latest sign of corporate turmoil within the food industry, where big firms have been preying on others ferociously in recent days. Various well-known companies have been rumored to be targets, and others, such as Nestle, the Switzerland-based food giant, and the Kohlberg Kravis Roberts investment group, have been said to be in the market for purchases.

In an effort to explain the wild activity of recent weeks, analysts have pointed to a growing appreciation of the value of established brand names, such as those owned by RJR Nabisco and Philip Morris. The household names are seen as especially potent tools for big food companies that seek to expand their sales in Asia, Europe and the developing world.

Last week, for example, Grand Metropolitan PLC, a British producer of wine and spirits, began a $5.2-billion attempt to take over Pillsbury and its powerhouse brand names, including Green Giant, Burger King and Haagen Dazs.

The takeover efforts are not always received warmly, however. Pillsbury is actively resisting Grand Metropolitan, and Kraft management thus far has distanced itself from the Philip Morris overture.

Despite that rationale, many are at a loss to explain the pace and size of the recent takeover attempts.


“No one really knows what it means,” said Jack H. Brown, chairman of Stater Bros. in Colton and a witness to the recent wave of supermarket consolidations in Southern California. He added: “At this point, I don’t think any of us (see it harming) the customer or creating a non-competitive environment. But how does it help the consumer?”

Clearly, the food and tobacco businesses remain profitable. In 1987, RJR Nabisco had $1.18 billion in profits on sales of $15.77 billion.

On Thursday, RJR Nabisco announced record third quarter sales of $4.2 billion. This included $2.4 billion in the food business and $1.8 billion in tobacco.

Analysts pointed to the profitability of RJR Nabisco’s products and speculated that bidding for the stock could rise significantly higher, perhaps over $100. They said the deal was made possible by the fact that social disapproval of smoking has depressed the stock values of tobacco companies.

Nonetheless, tobacco remains a highly profitable business, they pointed out.

According to Clinton Mayer, an analyst with the Bear Stearns investment firm in New York, both RJR Nabisco and Philip Morris have operating profit margins of 30% in tobacco. Moreover, sales overseas have been growing at 5% a year, in contrast to the United States, where the market is perceived to be in a long-term decline.

In addition, Mayer said that RJR Nabisco has “an excellent food business” and is especially strong in cookies and crackers. He estimated the firm’s operating profits from tobacco at $1.6 billion on sales of $5.2 billion, compared to the firm’s operating profits from food of $1.1 billion on sales of $10 billion.

“This is a very bankable deal,” said Robert Thompson, an analyst at Prudential Bache Securities Inc. in New York, suggesting that the price per share might rise to $110.

Excitement over the RJR Nabisco deal spread to other tobacco stocks, with American Brands gaining $4.75, to close at $59 a share, and Philip Morris up $5 a share, to close at $99.

Steven G. Einhorn, partner and investment strategist at Goldman, Sachs & Co. in New York, pointed out that such megadeals electrify the market for several reasons. “They energize the market, not only because they raise the price of target companies but they raise the price of surrounding ones--and they put cash in investors’ hands.”

Staff writer Paul Richter in New York contributed to this story.

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