Kohlberg Kravis Roberts & Co. plans to put only a little more than
known as KKR, will leverage its tiny down payment by borrowing more than
$18 billion, using about $1.5 billion in cash put up by a select group
of investors, and giving RJR Nabisco shareholders securities for the
rest of the $25 billion.
By outbidding two other potential buyers of the giant RJR Nabisco
food and tobacco empire in hectic negotiations that ended late Wednesday
night, KKR preserved its reputation as the preeminent firm specializing
in what Wall Street calls "leveraged buyouts."
The principle of leveraged buyouts is to borrow money to buy a
company. The business itself is used as collateral, and the loans are
paid off with the company's future profits or by reselling some of its
operations.
The "leverage" means that the buyer puts up as little of its own cash
as possible and uses it as a lever to gain control of a much larger
amount of assets.
KKR's plans for financing the purchase of RJR Nabisco shows just how
much leverage can be obtained.
The company's own cash investment will be just 1/1666 -- or .06
percent -- of the amount that is to be paid for RJR Nabisco's family of
familiar brands, which include Camel, Winston and Salem cigarettes, Life
Savers, Baby Ruth and Butterfinger candy, Planters peanuts, Animal
Crackers, Ritz, Triscuits, Sugar Honey Grahams, Shredded Wheat, Oreo
cookies and Del Monte foods.
KKR has previously used the leveraged buyout technique to purchase
Safeway -- after an unsuccessful bid by the Haft family of Washington --
for $4.2 billion; Beatrice Cos. Inc. for $6.1 billion, Owens-Illinois
Inc. for $3.7 billion, Stop & Shop (parent of Bradlees) for $1.2
billion, Duracell for $1.8 billion, and half a dozen other major
businesses.
To finance its purchases, KKR last year raised a $5 billion pool of
capital from a limited partnership of institutional investors that
include several public and private pension funds, college endowments and
insurance companies.
KKR itself contributed only $54.2 million to the $5 billion pool, or
a little more than one percent, but as the general partner in charge of
the investment has complete authority to use the money, according to
confidential documents given to potential partnership investors. In the
documents, KKR said it had previously earned profits of 59 percent a
year on its investments.
From that $5 billion pool, KKR will put $1.5 billion into the
purchase of RJR Nabisco, say sources familiar with terms of the
purchase. The purchase will be made through RJR Acquisition Corp. and
RJR Holdings Corp., two new Delaware corporations formed specifically
for the transaction.
Another $5 billion will be borrowed from the Wall Street investment
firms of Merrill Lynch & Co. and Drexel Burnham Lambert Inc., officials
of the two firms confirmed yesterday. The $5 billion is meant to be a
short-term "bridge loan" that will be repaid by issuing high-interest
bonds through Merrill Lynch and Drexel, probably next year.
The bulk of the money to pay for RJR Nabisco -- more than $13
billion -- will be borrowed from a group of banks that have not yet been
publicly identified. Because the loans are so big, dozens of banks are
expected to participate in the loans, including most of the nation's
major banks.
In addition to the more than $18 billion to be borrowed from the
banks and investment firms, KKR will have to assume more than $4.5
billion in debts that RJR Nabisco has previously taken on, which will
boost the total debt to about $22.8 billion.
In documents filed yesterday with the Securities and Exchange
Commission, KKR said it will pay RJR Nabisco stockholders $109 for each
share of common stock. Only $81 of that will be cash, provided by the
KKR partnership pool, the banks and the bridge loans. Shareholders will
also receive a new issue of preferred stock valued at $18 per share and
other securities valued at $10 a share, which will be convertible into
stock of RJR Holdings.
No cash will be involved in either the preferred stock or other
securities, although stockholders will be able to sell them, just as any
other securities.
The board of RJR Nabisco accepted the KKR offer late Wednesday
night, but the transaction theoretically could still founder if
stockholders refuse to accept the $109 a share offer. The stock was
selling for only $56 a share six weeks ago, when the possible sale of
the company was first raised.
RJR Nabisco went up for bids largely because its president, H. Ross
Johnson, believed the stock price was being held down by public concerns
about smoking and the future of the cigarette business, the company's
most profitable line.
Johnson decided to organize his own leveraged buyout and offered $75
a share for the stock, which had never before gone above $71. As soon as
Johnson's bid was made, several other firms started bidding and the
offers quickly jumped to $80 and then $100 a share.
KKR founder Henry Kravis was one of the first to bid, saying he
wanted to protect his firm's reputation as the leader in the leveraged
buyout business. Johnson brought in Shearson Lehman Hutton Inc., the
investment firm owned by American Express, to finance his offer, and the
investment banking firm First Boston Co. also joined in the bidding.
When the bids were opened, KKR came up several dollars a share ahead
of Johnson -- how much depends on how the bids are evaluated -- and the
First Boston offer was rejected because of contingencies. While KKR was
negotiating an agreement with the RJR board, Johnson came back with a
new offer, and then the board gave KKR another chance to raise its bid.
