Winner Issues Reassurances : Loser Hints of Continued Fight to Get RJR Nabisco
The disappointed bidder in history’s largest corporate takeover battle hinted bitterly Thursday that it might continue its fight for RJR Nabisco, while the winner of the $24.5-billion auction sought to reassure the world that it will not bankrupt or break up the food and tobacco giant.
In the aftermath of a bizarre five-week struggle, the bidding team led by RJR management criticized the auction that late Wednesday awarded the company to Kohlberg Kravis Roberts & Co., the nation’s top buyout firm.
“When we have the better bid, but can’t get them to listen, something is not right,” said an aide in the management camp of RJR. “We’re considering our options.”
Meanwhile, new details emerged about the frenetic final 24 hours of negotiations, in which each side at times seemed to be holding, then losing, the winning hand.
The takeover fight has riveted Wall Street and much of the country because of its huge scale and the questions it raises about takeovers, their tendency to break up companies and the growing indebtedness of corporate America.
In this instance, the debate has centered on a company that is known in every household through brands that include Camel and Winston cigarettes, Nabisco crackers, A1 Steak Sauce, Del Monte canned fruits, Fleischmann’s margarine, Uneeda Biscuits and Planter’s Peanuts.
The winning price of $24.5 billion is nearly twice as large as the second-largest takeover--the $13.4-billion acquisition in 1984 of Gulf Oil by Chevron--and exceeds the annual economic output of Ireland.
The battle has been fraught with controversy since it began Oct. 20, and its apparent close brought no relief. The losing side, which included the Shearson Lehman Hutton and Salomon Bros. investment firms, complained that the final bid that they valued at $112 a share, or $25.2 billion, was better than the final bid that Kohlberg Kravis valued at $109 a share, or $24.5 billion.
But the company’s non-management directors--who were responsible for deciding which offer was best--believed the Kohlberg Kravis bid was superior for several reasons, according to a source familiar with the board’s thinking. The directors believed that securities that KKR would issue to shareholders would have a higher value than securities offered by the management group, meaning that management’s bid might not be worth as much as stated.
The directors also leaned to the KKR proposal because it would give the company’s current shareholders more stock in the new company, which could become valuable if the buyout succeeds, sources said.
And, according to the source, directors inclined toward the Kohlberg Kravis bid because apparently it will involve a sale of a smaller portion of RJR’s food businesses. The management group, which is led by Chief Executive F. Ross Johnson, has said that to pay off some debt incurred in the takeover, it would sell off most or all RJR’s food businesses, while keeping the slow-growing but lucrative tobacco operations.
Kohlberg Kravis has insisted that it would keep the larger portion of the food operations, selling off perhaps $5 billion in business, out of a division that is valued at as much as $15 billion.
While Johnson sounded a somewhat conciliatory tone at one point Thursday, takeover experts said the management team has several options, none of them easy, if it wants to contest the outcome. The management team can put a higher offer before RJR directors, thus pressuring them to accept their deal lest they not fulfill their duty to RJR shareholders.
The losing bidders could also go to court, to challenge the bid on grounds that management failed to give shareholders the best deal. Such a move would put the management group in the possibly unprecedented step of suing its own company’s directors over a corporate decision, experts noted.
Such a court battle could quickly become bruising if the directors raised questions about the management team’s conduct in the fight as well. The management has already come in for heated criticism for its opening bid of $75 a share, which many considered too low, and for a rich compensation package they reportedly worked out with their partners in the deal.
Meanwhile, Kohlberg Kravis released details of its financing plan for the new company, in hopes of calming widely voiced fears that the heavy debt of such deals can push the company into bankruptcy. Kohlberg Kravis said one-third of the financing for the new company, or $7.4 billion, will take the form of stock, and the remainder, or $22.8 billion, in borrowings. The total of that financing exceeds the value of Kohlberg Kravis’ bid because it includes debt already on RJR’s books. (Kohlberg Kravis is likely to put very little of its own money into the deal--perhaps only $15 million, according to the Washington Post.)
By contrast, other buyout deals have far more lopsided ratios of debt to stock. The financing for Kohlberg’s buyout of Oakland-based Safeway Stores, for example, was 90% debt and 10% stock, a spokesman for the company noted.
“Given the public atmosphere now, with all the fears about these deals, we just want people to understand that this is being financed very conservatively,” said the spokesman, Thomas Daly Jr.
One of the firm’s principals, Henry Kravis, has told RJR officials that while some businesses would be sold off, he saw no reason to begin selling off parts immediately, aides said.
As smoke cleared on the takeover, members of both teams began describing the harrowing final negotiating sessions, which began Tuesday night and continued until the winner was chosen after 9 p.m. Wednesday. This drama played out on two different floors of the law firm of Skadden Arps Slate Meagher & Flom, which was adviser to the RJR directors in the auction.
At 10 p.m. Tuesday, it appeared that Kohlberg Kravis would be the winner with a $106-a-share bid. But when the advisers to the RJR board of directors invited Kohlberg Kravis aides to begin final negotiations, the management team began to bombard them with telephone calls and a letter, demanding an opportunity to raise their bid.
At about midnight Tuesday, the management group learned that its bid was $5 a share below Kohlberg Kravis’ and appeared to throw in the towel. Johnson told aides that the contest was over.
But during the night, the management team changed its mind, recanted its statement that it had given up and prepared a new bid. The new bid was structured similar to the Kohlberg Kravis bid, arousing suspicions in the Kohlberg camp that someone at the negotiating sessions had leaked information to Johnson.
At about 11 a.m. Wednesday, Johnson unilaterally presented his higher offer to the directors, then released details of it publicly, in order to increase pressure for the board to consider it. The board’s advisers agreed, and at 1 p.m. told the two sides they had until 1:15 p.m. to improve their bids.
The management group raised its bid to $112 a share while Kohlberg Kravis went to $108. The management group seemed again to have the edge.
For most of the afternoon, the two bidding groups were parked in separate areas of the law firm, waiting for the advisers to choose.
Many in the Kohlberg group, who had been up all night, napped in a vacant office. At one point, the snoring became so loud that key partner Henry Kravis, who was trying to read, “had to get up and leave,” said Casey Cogut, a lawyer for the Kohlberg Kravis group.
The climax came at 7:30 p.m. The board’s advisers gave Kohlberg Kravis another chance to raise its bid. The group agreed and raised its bid to $109, but only on condition that Johnson be excluded from the board’s deliberations, lest he find out the new bid and top it.
The Kohlberg Kravis group pushed harder. They gave the advisers a signed copy of a merger agreement, saying they would withdraw unless the board signed it too, within 30 minutes. In 40 minutes, the board returned a signed copy, and the battle was over.
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