Firm Offers $20 Billion for Nabisco : Tops Managers’ Record $17-Billion Buyout Proposal
Financial fireworks continued on Wall Street Monday, as a New York investment group offered a record-breaking $20.3 billion for RJR Nabisco in what would be the biggest corporate purchase in U.S. history.
The bid by the investment firm of Kohlberg Kravis Roberts & Co. eclipses a move last week by executives of RJR Nabisco--the food and tobacco giant--to buy their own company for a record $17 billion.
It is the latest in a series of takeover attempts that have left some of America’s most famous food companies reeling and could reshuffle ownership of some of the nation’s best known consumer products.
Analysts Stunned
“It’s been amazing,” said Roger W. Spencer, an analyst with Paine-Webber in Chicago. “Who knows what will happen next week? We’ll see.”
In recent days, Nabisco, Kraft Inc. and Pillsbury Co. all have been targeted by suitors. The burst of activity has stunned analysts as the stock prices of these companies have shot upward despite a generally sluggish stock market.
“It’s tulip mania in the food industry,” exclaimed Ronald B. Morrow, an analyst with the Smith Barney investment firm, referring to a speculative craze that engulfed Holland’s flower industry in the early 17th Century. “People are just wanting to buy things in the food industry.”
While exciting investors, the wild financial gyrations engender enormous uncertainty about the futures of the firms involved. Takeovers, whether successful or not, often lead to sweeping changes in a corporation. Companies often are saddled with huge debts and respond by selling off divisions and laying off employees.
Giant Pools of Cash
Perhaps no firm is better known for buying and overhauling companies than Kohlberg Kravis Roberts. It is backed by pension funds and other institutional investors and is reknowned in the investment world for its ability to raise giant pools of cash--and for its ambition to invest them throughout corporate America. Frequently, it has sold off pieces of firms it has taken over.
In the last two years, Kohlberg-led groups have taken over the Beatrice Cos. for $6.1 billion, Safeway Stores for $4.2 billion, Owens-Illinois Inc. for $3.7 billion, Storer Communications for $2.5 billion and Duracell for $1.8 billion, among others.
Kohlberg acknowledged Monday that it was considering selling off part of RJR Nabisco to help pay for the purchase, although it provided no details. “There are asset sales contemplated, but no decisions have been made,” Thomas M. Daly Jr., a spokesman for Kohlberg, said.
RJR Nabisco owns a grocery basket of popular brand names, including Del Monte canned fruits and vegetables, Oreo cookies, Ritz crackers, Planters peanuts and Winston, Salem and Camel cigarettes.
Last week, when RJR Nabisco’s top managers shocked the investment world with plans to buy their own company for $75 a share, analysts said the price looked low.
In announcing their challenge, the Kohlberg Kravis group agreed. “Management has decided that the company should be sold. Our offer is a superior one,” partner Henry R. Kravis said in a statement Monday. “Our background and experience in completing sizable transactions enables us to proceed rapidly to conclude this transaction.”
Firm Is 12 Years Old
The group is led by Kravis and George R. Roberts, who left the New York investment firm of Bear Stearns to start their own firm with Jerome Kohlberg Jr. 12 years ago. Kohlberg is no longer active as a manager of the investment group.
In the statement, the Kohlberg Kravis group said it would present its offer to RJR Nabisco’s board and proceed if board members viewed it favorably. Under its plan, Kohlberg would compensate shareholders $90 for each outstanding share, mostly in cash.
RJR Nabisco stock climbed $7.25 to $84 a share on the New York Stock Exchange as investors responded to the latest takeover news. Kraft jumped $10 to $102, as the company rejected Philip Morris’ $90-a-share takeover bid and proposed its own plan valued at $110 a share or more.
More Suitors Possible
Morrow of Smith Barney said he thought the RJR Nabisco stock was worth $90 to $115 a share. When asked if other suitors might emerge, he observed that, in the current environment, “anything is possible.”
The Kohlberg group disclosed also Monday that it is using four investment firms--Morgan Stanley & Co., Wasserstein, Perella & Co., Drexel Burnham Lambert Inc. and Merrill Lynch Capital Markets--”to advise and assist in structuring and financing the transaction,” Daly said.
Neil Kaplan, an analyst with the Interstate/Johnson Lane investment firm in Charlotte, N. C., said that the bidding war for RJR Nabisco has raised the price so high that it is likely the company will be partly broken up to help pay for the transaction.
When asked if he thought the $20-billion price was reasonable, he said: “It’s more than I would have paid. But I think people are starting to get carried away.”
Kraft Sets Up Defenses
At Kraft, executives--seeking to ward off the unwelcome advances of Philip Morris Cos.--have announced a far-reaching defensive plan that would require them to unload some assets, but they have not said which ones they are taking to market.
Kraft sells a variety of dairy and other products, such as Miracle Whip salad dressing, Philadelphia cream cheese and Velveeta. On Sunday, the firm announced that it would resist the Philip Morris bid, estimated in the range of $11.5 billion, and countered with its own $13-billion restructuring plan.
Pillsbury, which owns Burger King, Green Giant vegetables, Haagen-Dazs ice cream and other products, has not said whether it will sell off part of the business in its efforts to rebuff a $5.2-billion takeover attempt by Grand Metropolitan PLC of London.
Record Set by Chevron
Although dwarfed by the RJR Nabisco bidding war, the prices associated with Kraft and Pillsbury are among the largest ever. The single largest merger on record is Chevron Corp.’s 1984 purchase of Gulf Oil for $13.2 billion.
The financial frenzy that has engulfed America’s food manufacturers has rekindled a debate on the value to society of such financial gyrations.
“If you devote your talent to all these financial machinations instead of trying to produce more efficiently, you might get financial success that doesn’t particularly benefit the overall economy,” said Robert Eisner, president of the American Economic Assn. and a professor at Northwestern University.
Staff writer Nancy Rivera Brooks contributed to this story.
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