Management Group Spurts Past KKR in Bidding for RJR

A stunning, eleventh-hour bid of $24.8 billion appeared Wednesday to put a management-led buyout group on top in the bitter battle for control of food and tobacco giant RJR Nabisco.

The group led by RJR President F. Ross Johnson submitted its bid even after company directors had agreed to enter final negotiations with the Kohlberg Kravis Roberts & Co. buyout firm.

“It looked like it was KKR’s deal; then Ross Johnson plopped down his offer,” said a source close to the negotiations.

A special committee of company directors continued to review the bids late Wednesday evening at the Manhattan offices of its legal advisers, the top merger firm of Skadden, Arps, Slate, Meagher & Flom. Outside the negotiating room nervously waited a cast of dozens, including Johnson, other RJR company officials and some of the New York’s highest price legal and investment banking talent.

The apparent reversal in the battle was only the latest dramatic development in the biggest takeover fight in history, which has stirred unusual bitterness and controversy since it was begun five weeks ago. The fight for RJR Nabisco’s cornucopia of brand-name products has raised questions about the increased indebtedness of American corporations, and the type of takeover deals called leveraged buyouts.

Critics have charged that management-led groups have an unfair advantage in such buyout proposals, and pointed to a rich deal that RJR management reportedly planned to cut for itself with its principal partner, the Shearson Lehman Hutton investment firm. Such complaints may be renewed if management wins with its latest bid, which a source said was submitted after the bidding deadline.

“Johnson seems ready to do anything to win this company,” said one source close to the negotiations, expressing astonishment.

KKR, the top leveraged buyout firm, was considered the underdog coming into this latest round of bidding. KKR had bid $94 a share in the earlier round, while management group had offered $100 a share.

But on Tuesday, KKR seemed to have won the battle for control with the $103 a share, or $23.7 billion, bid. At 10 p.m. Tuesday, advisers to the RJR board invited KKR representatives to meet with them to negotiate further over their apparent winning bid.

The management group’s second-round bid had come in Tuesday afternoon at $101 a share, or $23.2 billion, which the group’s advisers expected would be sufficient to beat KKR. The management group’s advisers were “totally shocked” by the higher KKR bid, a source said.

The KKR representatives spent Tuesday night at the law firm, working with advisers to the special committee, confident they had cinched the biggest corporate prize ever put on the market. At midnight Tuesday, a management group spokesman acknowledged that KKR’s bid was superior, and said contest was over, according to a published report.

But Wednesday morning, Johnson’s team had apparently learned the size and design of the KKR bid, and at about noon, brought a new offer to the board.

Management’s new bid was structured similar to KKR’s and valued at $108 a share--$84 a share in cash, $20 in preferred stock, and $4 in additional preferred stock convertible to shares in the new company. The offer represented a reduction in the cash component of the bid, which was $90 in the first round.

KKR valued its last offer at $106, including $80 in cash, $18 in preferred stock, and additional preferred that would be convertible into stock in the new company that it valued at $8 a share.

KKR advisers were outraged by the submission of this offer, and charged that the bid violated the directors’ rule that no bid would be accepted after the 5 p.m. Tuesday deadline. Some KKR advisers believed that Johnson found out the details of the KKR offer improperly, through his contacts within the firm.

The size of the new offers raised questions in some observers’ minds about whether the winning bidders would end up taking on more debt than the company could service. Winning may become a “Pyrrhic victory,” said analyst Neal Kaplan, of First Interstate Securities, suggesting that the management group may eventually regret the buyout.

The third party to bid Tuesday, apparently unsuccessfully, was a group headed by the First Boston investment bank. It had valued its bid at up to $118 a share, or $27.14 billion. But the bid was considered questionable because of its heavy dependence on a tax loophole that expires Dec. 31.