$24.5-Billion Bid Wins RJR Nabisco : Record Offer From Buyout Specialist Ends Nation's Biggest Takeover Battle

Times Staff Writer

With a stunning, eleventh-hour bid of about $24.5 billion, the nation's leading corporate buyout firm late Wednesday won control of tobacco and food giant RJR Nabisco and brought to a close the biggest takeover battle in corporate history.

In a third frenzied round of bidding, the investment firm of Kohlberg Kravis Roberts & Co. overcame a buyout group led by RJR's own top executives, and was declared victor in the five-week-old contest.

The acquisition would hand Kohlberg Kravis a bounty of valuable food and tobacco brands, including Camel, Salem, and Winston cigarettes, Oreo cookies, Grey Poupon Dijon mustard, Life Savers candy, and Hawaiian Punch fruit drink.

Watched With Interest

The sale of RJR has been watched with keen interest on Wall Street and elsewhere because of its huge size and because of questions it raises about the growing indebtedness of U.S. companies. The takeover is almost twice the size of the previous record: Chevron's 1984 purchase of Gulf for $13.4 billion.

The announcement came late Wednesday evening from the board of directors of RJR, which is the nation's 19th largest corporation, with 125,000 employees and 1987 sales of $15.8 billion.

The directors said the bid, valued at $109 a share in cash and securities was superior to the management group's last bid which the RJR directors said was valued at $112 a share, also in cash and securities. The directors said their decision was unanimous, but did not spell out their reasons.

In a statement, the victorious investment firm principals, Henry Kravis, 44, and George Roberts, 45, said they were "pleased that this process has come to an end, so the employees of RJR, its consumers and suppliers . . . can be assured that business will now return to normal."

Kohlberg Kravis is expected to sell off a portion of RJR's food businesses to pay down some of the debt, expected to be near $20 billion. At the same time, KKR officials have promised that they would sell off fewer of the company's food brands than would their principal rival in the takeover battle, the management-led group.

The new owner is expected to hold on to the company's slow-growing but highly profitable tobacco business.

The decision marks a bitter defeat for the management group led by RJR President F. Ross Johnson, who began the battle five weeks ago with a proposal to take the company private, and who appeared to be close to a victory earlier Wednesday.

The decision, announced by RJR managers Wednesday night, was only the latest remarkable turn in a saga that has generated drama and controversy since it was begun. As it developed into an all-out brawl between four groups of bidders and their advisers, the contest also focused attention on the merits of the takeover deals called leveraged buyouts.

In these transactions, a company's management or an outside firm borrows huge amounts to buy the company and then tries to repay the debts through improving profits or by selling off assets. Critics have charged that these deals make huge sums for the acquirers and their advisers, but throw scores of workers out of jobs while draining off money needed for research and development and their productive uses.

Managers Face Criticism

Johnson and his fellow managers were accused by some of trying to unfairly exploit their positions when they offered what was perceived as a low initial bid of $75. They faced criticism, too, when it was reported that they had cut a compensation deal with their principal partner, the Shearson Lehman Hutton investment firm, that could have given a small group of managers company stock worth $2.6 billion within four years' time.

The buyout deal also angered RJR bondholders, who saw the value of their investment fall sharply when the buyout was announced, because of implications that the more heavily leveraged company would be a bigger credit risk. Metropolitan Life, the New York-based insurance company, last week sued RJR over the issue.

The strong feeling about such deals are illustrated in the views of workers in the company's original headquarters, in Winston-Salem, N.C. Though many of the workers stand to make thousands of dollars from the deal, they also deplore a transaction that threatens to break up a beloved institution.

While the deal may generate $500 million in fees for Wall Street investment bankers and takeover lawyers, some fear that it may draw attention to one of Wall Street's biggest money-makers by increasing public concern and perhaps prompting government action. House Speaker Jim Wright (D-Tex.) and Rep. John D. Dingell (D-Mich.), the powerful chairman of the Energy and Commerce Committee, have both spoken of their concern about the growing trend to such buyouts.

"This has been on every front page in America, and I'm just afraid it's going to bring on some rash action to stop these buyouts," a Wall Street mergers expert said Wednesday.

The deal will certainly bring windfall for many of the company's shareholders, for the stock was traded at $55 on Oct. 20, when Johnson announced his buyout plan.

The announcement is likely to bring praise for the non-management directors of the company who conducted the auction. Directors in such situations usually accept the management's first buyout offer.

But the RJR directors, perhaps fearing shareholder lawsuits if they sold the company too cheaply, rejected Johnson's initial $75 a share bid and opened the bidding to all comers.

The final act of the takeover contest began late Tuesday afternoon, when the second round of bids for the company were due. KKR, which fell behind in the earlier round of bids, appeared to be close to a victory then, with a bid of $103 a share, or $23.7 billion.

At 10 p.m Tuesday, advisers to the RJR board invited KKR representatives to the room in which they were meeting, in the offices of the top merger law firm of Skadden Arps, Meagher, Slate & Flom. They worked around the clock to iron out the final details of an agreement.

But Wednesday morning RJR President Johnson learned details of the KKR offer, and before noon submitted his own third offer. KKR officials were outraged that the committee of directors handing the bids would entertain an offer after the Tuesday afternoon filing deadline.

But they were "a lot calmer," said one person close to the negotiations, when the special committee of directors also agreed to consider their final, and winning, offer. The full board of directors reached its decision by about 9 p.m.

The RJR directors said the acquisition will take place through a stock tender offer, which will give stockholders $81 in cash, $18 in preferred stock, and $10 in convertible debentures for each of their RJR shares.

KKR's victory will further add to the firm's standing as the top practitioner in leveraged buyouts. When it began promoting the practice in the mid-1970s, KKR was unable to attract much notice from the major Wall Street firms. But by the mid-1980s, leveraged buyouts were one of the investment world's most lucrative enterprises, producing investment returns averaging 40%.

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