Big Bondholders Launch Revolt Against Nabisco : Met Life, ITT-Hartford Suits Claim Buyout Would Depress Value of Portfolios
Some of the nation’s biggest bondholders have launched an open rebellion against RJR Nabisco, charging that a proposed buyout of the giant food company would enrich a few executives at the bondholders’ expense.
Saying that the value of RJR bonds has fallen nearly $1 billion since company executives said they were considering a management-led buyout, Metropolitan Life Insurance Co. announced Thursday it had sued RJR for restitution in New York Supreme Court. A similar suit was filed by ITT-Hartford insurance units Wednesday.
“RJR has gone to the well for public debt for many years and now they are trying to poison it,” said John J. Creedon, Met Life’s president and chief executive. “This is a clear case of management abusing its position--breaching its promise not to intentionally destroy investment grade character of the debt, while lining its own pockets.”
The lawsuits reflect growing ferment among bondholders for greater price protection from debt issuers. In recent years, bondholders have been stung by leveraged buyouts and seen a drop in the value of their investments in debt issued by such firms as Borg-Warner, Revco and Owens-Illinois. An RJR spokeswoman said the company had no comment on pending litigation.
Trading Halted
The bondholders’ revolt comes as RJR directors move toward action on the $20-billion bidding war for the cigarette, cookie and cereal maker. Rumors swept Wall Street on Thursday in anticipation of today’s 5 p.m. deadline for bids.
In fact, trading in RJR stock was halted briefly Thursday afternoon following rumors that the New York buyout firm of Kohlberg Kravis Roberts & Co. might withdraw its $90-a-share offer. RJR was the most actively traded stock Thursday on the New York Stock Exchange and closed at $82.75 a share, down $1.25.
A spokesman for KKR said the firm doesn’t comment on rumors, adding: “If KKR has something to announce, we’ll announce it.”
The bidding battle began Oct. 20 when the Atlanta-based company announced that a management group was considering a $17.6-billion buyout. The two leading bidders are KKR with the $90-a-share offer and the RJR management group, which includes Shearson Lehman Hutton Inc. and Salomon Inc. The management bid is valued at $92 a share. Both are expected to submit new offers by today’s deadline.
On Wednesday, a third group led by buyout specialist Forstmann, Little & Co. dropped out of the competition. But there were reports of others bidders in the wings, including a group led by First Boston Corp. and Resource Holdings, a private firm in which Chicago hotelier Jay Pritzker and Denver oil man Philip Anschutz are partners.
The group has told RJR Nabisco that its offer is worth “triple figures” per share in cash, according to a source quoted by financial columnist John Crudele in an upcoming column. The notes could then immediately be exchanged for cash through a bank arrangement by the company, and a cash distribution could be made to shareholders, the source said. The shareholders would get more cash from sale of the tobacco business to First Boston and Resource Holdings, and could get additional cash if the food businesses are eventually sold for a larger-than-expected amount.
Even as RJR stockholders have seen their holdings grow in value since the buyout proposal was unveiled, bondholders have experienced just the opposite.
After RJR made its buyout announcement, prices of RJR corporate bonds--considered for years to be one of the safest of corporate debt issues--fell dramatically. The old debt is now viewed as riskier in view of the additional debt that would be needed for a buyout.
In 1986, for instance, Revco--a Midwestern chain of drugstores--went private in a leveraged buyout. In such buyouts, the company stock is purchased with money borrowed against the firm’s assets and revenue. But in the case of Revco, sales and earnings failed to meet projections and the firm could not meet its interest payments. As a result, the firm filed for Chapter 11 bankruptcy protection.
Met Life’s suit against RJR charges that the proposed buyout illegally deprives Met Life and other bondholders of the value of their investment and enriches management and the other participants in the buyout. Met Life said it holds more than $340 million of RJR notes and debentures and suffered an estimated market value loss of $40 million.
The units of ITT filed their lawsuit in federal court and charged that their portfolios were hurt because RJR didn’t disclose its intention to undergo a leveraged buyout when ITT bought bonds in April. ITT’s paper losses are estimated at $1.4 million, compared to a total bond portfolio of $15 billion.
Met Life Chairman Creedon noted at a press conference in Manhattan that the “fevered pitch for larger and more complicated mega-deals is posing a real threat to the integrity of the capital markets of this country,” and called for policy-makers and participants in the process to examine the consequences of these deals.
Creedon declined however to endorse a particular remedy or policy that he would support to address his grievances.
“To wantonly destroy the value of long-term debt is to jeopardize the very foundation of our capitalist system, and we don’t intend to let this happen,” Creedon said.
But Roger Craig, manager of fixed income for the Columbus, Ohio-based Banc One Asset Management Corp., took a different view. There is always risk in investing, he noted, suggesting that bondholders may have unrealistic expectations.
“Management has always had the responsibility to maximize the risk,” he said. “Corporate investors have felt very minimal risk in holding corporate bonds, unjustifiably so. They’ve been willing to pay small premiums to buy the bonds, and a lot of this is just coming home.”
