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Nabisco Buyout A Defensive Move, Analysts Say

October 21, 1988

ATLANTA (AP) _ RJR Nabisco Inc. managers dropped a $17 billion bombshell by disclosing they are considering a buyout of the food and tobacco company at that price, which would make it the largest takeover in history.

Analysts speculated the move was designed to dissuade unwanted suitors from approaching Nabisco, maker of Winston and Camel cigarettes, Oreo cookies and Ritz crackers.

Thursday’s announcement that a group led by president and chief executive F. Ross Johnson is mulling a $75-a-share offer to take Nabisco private sent the company’s stock soaring. In heavy trading on the New York Stock Exchange, Nabisco jumped $21.37 1/2 a share to $77.25, and observers predicted the price will go higher.

Lawrence Adelman, an analyst at Drexel Burnham Lambert Inc., priced Nabisco at between $90 and $100 a share and said Johnson ″is trying to steal the company″ at $75 a share.

Analysts viewed the move as a ″pre-emptive strike″ designed to ward off other unwanted bidders at a time when the takeover spotlight is shining brightly on major food companies.

On Monday, Philip Morris Cos. Inc. offered more than $11 billion for processed foods manufacturer Kraft Inc. The following day, Pillsbury Co. rejected a $5.23 billion tender offer launched by Britain’s Grand Metropolitan PLC.

Neal Kaplan, an analyst with Interstate-Johnson Lane in Charlotte, N.C., said Nabisco ″may be recognizing that others may be looking at them.″

At the same time, he said, Nabisco executives see Philip Morris paying ″20-odd times earnings for Kraft and say, ’We can spend all our money and buy ourselves, which we know is good.‴

He viewed the buyout proposal as a continuation of Nabisco’s strategy of buying back its own stock. On July 31, the company had 225 million shares outstanding, down from 247 million at the end of 1987. At $75 a share, the buyout proposal currently is worth about $16.88 billion.

Nabisco said Johnson and Edward A. Horrigan Jr., chief executive of the company’s tobacco business, had notified the company they ″intend to seek to develop, with a financial partner, a proposal to acquire RJR Nabisco in a leveraged buyout merger transaction.″

Shearson Lehman Hutton Inc., which is advising the management group, would provide equity and financing for the deal.

The company said late Thursday the offer will be reviewed by a special committee of outside directors led by Chairman Charles E. Hugel. Leaving the door open for a bidding war, the committee also said it will review ″any other acquisition interest that may be presented.″

While some analysts suggested a buyout would have to reach at least $85 a share to be successful, Kaplan said a $75 ″looks like a darn good number.″

At that level, he said, the company could pay off new debt through revenues, a strategy that would be more difficult at a higher price.

In a leveraged buyout, the buyer borrows the money to buy the company, then pays off the debt either through company revenue or selling off parts of the operation.

Today’s editions of the Wall Street Journal quoted people familiar with the management group’s strategy as saying it intends to utterly transform the tobacco-and-food conglomerate, largely by divesting as much of its non-tobacco businesses as necessary to pay off debt.

Like other tobacco companies, Nabisco’s stock has been driven lower by worries over cigarette liability suits. ’Valuing Nabisco as a food company and discounting the tobacco operation, I arrive at a value somewhere between $85 and $90″ a share, said Pavlos Alexandrakis, an analyst with Argus Research Corp. in New York.

If the deal were completed, it would be the biggest leveraged buyout of an American corporation, widely surpassing the $6.1 billion buyout of Beatrice Cos. by an investment group led by Kohlberg Kravis Roberts & Co. in 1986.

It also would top the biggest corporate acquisition, the $13.4 billion purchase of Gulf Corp. by Chevron Corp. in 1984.

In the quarter ended Sept. 30, Nabisco said it earned $355 million on sales of $4.16 billion, compared to $320 million in profits and sales of $3.84 billion in the same quarter last year.

Income from tobacco operations was $497 million in the quarter on sales of $1.78 billion, while food income accounted for $276 million on $2.38 billion in sales.

RJR Nabisco was formed when the tobacco company R.J. Reynolds Industries Inc. bought Nabisco Brands Inc., the food and consumer products giant, for $4.9 billion in 1985. Today the company ranks as the nation’s 19th largest industrial concern.

Johnson came to the conglomerate from Nabisco and last year shifted the company’s headquarters from Winston-Salem, N.C., to Atlanta in a move seen as an attempt to distance the company from its tobacco beginnings.

Among the company’s major products are Salem cigarettes, Lorna Doone and Mallomar cookies, Chuckles and Junior Mints candy, Del Monte vegetables and Milk-Bone dog biscuits.

Nabisco currently is test-marketing a smokeless cigarette, Premier.

In 1987, RJR Nabisco had profits of $1.18 billion on sales of $15.77 billion. That level of sales would make RJR Nabisco the third largest privately held company in the country according to Forbes magazine, behind Cargill, a commodity trading company, and Safeway Stores Inc., the grocery chain.

In the past few years, the company has sold off divisions, including Kentucky Fried Chicken, that did not fit with its long-range plans.

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