$20.75 Billion Bid for Nabisco by Management
The clash for control of RJR Nabisco Inc. continued to shatter financial records Thursday, as the firm’s top executives raised to $20.75 billion their offer to buy the food and tobacco giant.
The new offer, exceeding a rival $20.3-billion bid by Kohlberg Kravis Roberts & Co., is the latest in a flurry of multibillion-dollar bids for some of the most famous names in corporate America. It suggested that the buyout fever engulfing Wall Street may not be over, although investors responded uncertainly to Thursday’s news.
Merger Mania
“Whether this is the last bid or not, we’ll have to see,” said Emanuel Goldman, an analyst at Paine-Webber in San Francisco.
Indeed, nobody seemed sure Thursday where merger mania would strike next, in light of the growing list of established companies now besieged by takeover offers--both real and imagined.
Sears, Roebuck & Co. was the most actively traded stock on the New York Stock Exchange on Thursday amid speculation that the retail giant might be Wall Street’s next target. Its stock price soared $3 a share and trading was halted temporarily.
Meanwhile, Pillsbury Co. is expected to respond today to a $5.23-billion takeover bid made last month by Grand Metropolitan, a London-based producer of wine and spirits. Pillsbury’s board of directors met all day Thursday weighing alternatives, analysts said.
Earlier this week, Philip Morris Cos. agreed to buy Kraft Corp. for $13.1 billion in the biggest non-oil merger ever, creating a new powerhouse in the food industry.
But even that transaction pales next to the RJR Nabisco sweepstakes. In a statement Thursday, RJR Nabisco’s president and chief executive, F. Ross Johnson, described the $92-a-share bid--partly financed by Shearson Lehman Hutton and Salomon Bros.--as a “full and fair price” for his firm.
“Our offer demonstrates our commitment to this acquisition,” Johnson said. He maintained that the purchase would benefit “the company, its employees and the communities we serve, because our management group would bring the continuity and know-how needed to ensure the continued long-term success of the business.”
Makes Oreo Cookies
Atlanta-based RJR Nabisco owns some of the nation’s most popular food and tobacco products, including Oreo cookies, Fleischmann’s margarine, Life Savers candy, Hawaiian Punch and Winston, Doral and Camel cigarettes. It has 120,000 employees and reported sales of $15.77 billion for 1987.
Its stock rose 25 cents to close at $87 Thursday, as investors seemed to question whether the deal would be completed. “There are other players expressing interest,” John C. Bierbusse, an analyst with A. G. Edwards in St. Louis, said of the RJR Nabisco situation. “We’ll see where it goes.”
Thursday’s buyout offer continues a confusing series of bids and counter-bids for RJR Nabisco, sparked two weeks ago when the management group disclosed plans to buy the company from shareholders for $17 billion. That announcement triggered a competing offer of $20.3 billion--the highest in history--from the Kohlberg Kravis investment group, which specializes in such deals.
The rivals later entered talks aimed at arranging a joint takeover but thus far have failed to reach any agreement. Earlier this week, a special committee set up by RJR Nabisco’s board put the giant firm on the auction block, publicly asking for more bids.
It isn’t clear, however, if investors will line up to enter a bidding war that has crossed the $20-billion threshold. Forstmann Little & Co., a rival of Kohlberg Kravis, was rumored to be considering entering the fray Thursday, but company executives had no comment.
At the same time, the Kohlberg Kravis group, which takes great pride in its status as the nation’s richest buyout firm, has been criticized by some of its own investors, including pension funds, for entering a takeover fight that is increasingly hostile.
When asked about the new offer, an outside spokesman for Kohlberg Kravis seemed to hint that the investment group had not ruled out efforts at participating in the deal with RJR Nabisco’s managers.
“There may be other discussions; there may not be other discussions,” said Thomas M. Daly Jr., an outside spokesman for Kohlberg Kravis. “Other than that, I have nothing to say.”
The rival bidders are planning what is known as a leveraged buyout. In such a deal, the buyer is able to purchase a firm by taking on huge amounts of debt, often in the form of high-risk, high-yield junk bonds.
Typically, the debt is reduced after the purchase by selling off parts of the company and slashing costs through layoffs and other measures. Advocates argue that such actions enhance the efficiency of companies. But such deals have been criticized for turning top executives into millionaires while saddling firms with crippling debt.
Has Financing Lined Up
Johnson said Thursday that he had lined up commitments to finance the deal with temporary loans, known as bridge loans, as well as other financing. Under the proposal, RJR Nabisco shareholders would get $84 in cash and $8 in unspecified securities for each share of Nabisco stock.
“I am committed to our quality partners at Shearson Lehman and Salomon who have the financial resources and the expertise required for this transaction,” he said.
It is not known exactly what would be left of RJR Nabisco if a buyout is completed.
Kohlberg Kravis last week sought to rally support for its offer by raising the issue. In a letter to Charles E. Hugel, chairman of a special committee of outside directors of the firm, the Kohlberg group warned that the management group was trying to sell off “significant” portions of the company.
Kohlberg Kravis maintained that--in contrast--if their $20.3-billion offer prevailed, “we do not contemplate the dismemberment” of RJR Nabisco.
May Sell Off Parts of Firm
Johnson has been rumored to be considering the sale of parts of RJR Nabisco’s varied food operations, which have strong brand-name recognition. The tobacco business--although facing an uncertain future because of growing social disapproval of smoking--remains extremely profitable.
Analysts were uncertain Thursday whether the bidding would escalate much beyond current levels, which already dwarf the scale of previous buyouts. Currently, the most ever paid for a U.S. company was the $13.2-billion takeover of Gulf Oil by Chevron in 1984.
“There’s no real reason to go higher,” said Neal Kaplan, an analyst for the Interstate Johnson Lane investment firm in Charlotte, N. C. “But, if KKR wants to play ‘my ego’s bigger than your ego,’ they could go higher.”
He added that the new management bid might give Kohlberg Kravis an excuse to abandon the contest if the firm is seeking one to placate unhappy institutional investors.
“Every time you go up, you’re talking billions of dollars,” said Jack Maxwell with Wheat First Securities in Richmond, Va.
