KKR Will Get $234.4 Million if Buyout Falls Through : Drexel to Lend $3.5 Billion for RJR Deal

Drexel Burnham Lambert has promised to provide up to $3.5 billion in temporary financing for the takeover of RJR Nabisco, believed to be the largest single commitment of capital ever offered by a securities firm in such a deal, it was disclosed Friday.

Meanwhile, Kohlberg Kravis Roberts, the investment firm that agreed on Wednesday to acquire RJR Nabisco for a record $24.5 billion, also disclosed that it would get an unprecedented $234.4-million termination fee if the deal falls through.

Details of Drexel’s loan and the KKR termination fee came in a Securities and Exchange Commission filing by KKR detailing its merger agreement.

Drexel’s so-called bridge loan, which will allow the deal to proceed before long-term funds can be secured, is a key part of a complex financing arrangement that also will involve high-yield “junk bonds” and a lending group headed by four giant New York banks. Merrill Lynch, a major Wall Street investment firm, is offering another $1.5 billion in bridge financing.

Securities firms’ increasing use of bridge loans--while fueling the recent takeover boom--has dramatically increased the risks that face securities. Permanent financing by others could fall through, leaving them stuck with the loans that could be jeopardized if economic conditions worsen. Until recent years, Wall Street firms rarely committed so much capital of their own to takeover deals.

The four lead banks for the loan group--Chase Manhattan, Manufacturers Hanover Trust, Bankers Trust and Citibank--have committed $2.7 billion of their own funds and will try to raise a further $11.3 billion from other U.S. and foreign banks, the filing said.

In addition, KKR announced in the filing terms on $6 billion in junk bonds it will issue. KKR is committing another $2 billion that it has raised from pension funds, life insurance companies and other institutional investors.

KKR also said it has a letter from Drexel and Merrill Lynch saying they are “highly confident” that they will be able to refinance their bridge loans with more permanent financing, possibly through junk bonds.

The financing package, in place since Wednesday, was a key factor in swaying RJR Nabisco’s outside directors to accept KKR’s bid over a rival, higher-priced offer from a group led by RJR Nabisco Chief Executive F. Ross Johnson.

The directors also picked KKR because it was committing more equity while leaving existing shareholders with a larger stake in the company.