Managers’ Projections Underestimated Earnings : Nabisco Withheld Vital Data, KKR Tells SEC

The winning bidder in the RJR Nabisco takeover fight Wednesday disclosed information that seemed to lend new credibility to its complaint that its opponents in the management-led bidding group withheld vital financial data that could have cost it the battle.

In a filing with the Securities and Exchange Commission, the Kohlberg Kravis Robert buyout firm said the RJR management group initially gave it earnings projections that may have seriously underestimated the future profitability of the company’s big international tobacco operations.

The disclosure also underscored the criticism of management’s hardball tactics during the takeover fight.

Kohlberg Kravis advisers complained during the contest that the management group had given them incorrect numbers. Projections that underestimated earnings might have caused Kohlberg Kravis to underbid for the company and to lose it to management rivals who had long intimacy with the company’s inner workings.

The management-led group fought fiercely to win the contest and was accused of trying to buy the company on the cheap with its initial $17-billion bid. The firm’s board voted late Nov. 30 to accept Kohlberg’s offer.

The buyout firm said its advisers were first told that operating income from RJR’s international tobacco business could be expected to grow 15.2% in 1989, 9.9% in 1990 and 11% for the next eight years.

Later, however, after apparent discrepancies in the numbers surfaced, the company came up with new projections showing that the division’s operating income could be expected to grow 15% a year through 1998.

The international tobacco division is expected to provide about 25% of RJR tobacco sales this year.

Jack Nusbaum, an attorney who was a senior adviser to the management group during the fight, declined comment.

Meanwhile, in a separate SEC filing, RJR’s board of directors indicated that they chose the Kohlberg bid in part because of the buyout firm’s pledges to maintain the benefits of RJR employees who might lose their jobs in any selloff of RJR businesses.

In their first official explanation of how they chose the winning bid, the RJR directors noted that Kohlberg was “willing to provide for the preservation of benefits for employees whose jobs would be terminated as a result of divestiture . . . while representatives of the management group were unwilling.”

The directors’ official account supported earlier reports that the board considered the two bids roughly equal in value but chose Kohlberg Kravis bid because it promised to preserve most of the company and to be better for employees.

The SEC filing shows that Kohlberg has pledged to keep employees’ salaries at least at current levels through the end of 1991 and to increase them to account for inflation. The buyout firm has also pledged to maintain retirement, savings and severance compensation commitments through that date, under written commitments that will be included in the merger agreement.

The agreement would also require any company that buys an RJR division to also honor them.