House Panel to Probe RJR Nabisco Buyout
A congressional panel on Wednesday revealed that it has launched a broad investigation into the multibillion-dollar leveraged buyout of RJR Nabisco Inc.
Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, asked RJR Nabisco President F. Ross Johnson e and nine members of the company’s board to supply documents and submit to interviews.
A management group headed by Johnson sparked a bidding war in October by offering to buy RJR Nabisco, the giant food and tobacco products company. The group eventually lost out to the investment firm Kohlberg Kravis Roberts & Co., which bid a record $24.5 billion.
Dingell, in letters dated Wednesday, asked for voluntary cooperation with the investigation into the leveraged buyout, commonly known as an LBO, but said his oversight and investigations subcommittee could issue subpoenas.
In a leveraged buyout, an investment group uses borrowed money to buy out stockholders and take over a company. Often leveraged buyouts are proposed by parties seeking to undertake or thwart a hostile takeover.
Adequacy of Securities Laws
The subcommittee “is conducting an investigation into the application and adequacy of the federal securities laws in connection with the recent offers to purchase RJR Nabisco Inc.,” Dingell wrote.
He asked for information “pertaining to any discussion, consideration or analysis regarding a possible or actual offer” from Johnson and RJR Nabisco management and “regarding other alternatives for raising the value or market price of the company’s stock.”
Dingell asked for copies of documents by Jan. 13 and requested that the executives travel to Washington to be interviewed by congressional aides by Feb. 3.
The company’s new owners use cash flow or money raised by the sale of assets to pay back the loans, often resulting in streamlining that can mean layoffs.
Disclosure Rules
Critics of the practice fear the unusually high debt levels, in an economic downturn, would endanger both the company and the banks and investment firms making the loans.
Meanwhile, Securities and Exchange Commission Chairman David S. Ruder, in a letter to the Energy and Commerce finance subcommittee, said the SEC has begun “a broad fact gathering effort . . . including a study of some of the largest leveraged buyouts of recent years.
“In particular, the staff will focus on the exposure of broker-dealers and investment banking firms providing bridge financing in leveraged acquisitions.”
The agency also will examine the adequacy of its disclosure rules, designed to warn existing bondholders and other investors of any risks in LBOs.
Ruder is scheduled to testify regarding LBOs to the subcommittee today.
