STRATEGIES '91: RJR Nabisco's Historic Buyout Gets an Overhaul
Dec. 17, 1991
Undated (AP) _ By JOYCE M. ROSENBERG AP Business Writer
NEW YORK (AP) - The $25 billion buyout of RJR Nabisco Inc. was a trailblazer from the moment anyone knew the biggest corporate takeover of all time was in the offing.
And so it remains, nearly three years later.
But now, the huge leveraged buyout is known not just for its size, but also as the most successful ''reverse LBO'' of 1991, when the food and tobacco conglomerate returned to public ownership in a massive refinancing engineered by Kohlberg Kravis Roberts & Co.
Kohlberg Kravis, the investment firm that bought RJR Nabisco with mostly borrowed money, systematically restructured the company's finances, selling stock and bonds and paring away expensive high-yield securities and bank loans.
In doing so, Kohlberg Kravis set a standard for other companies taken private in the roaring '80s.
''A company with a mission'' emerged from the buyout, said Emanuel Goldman, a food industry analyst with PaineWebber Inc., in a recent report on RJR Nabisco.
''... The new owners embarked upon an aggressive campaign to repair the balance sheet by improving operating deficiencies, selling non-strategic assets and reducing the heavy debt load,'' he said.
The refinancing was careful and methodical.
The first step came in November 1990 with a $1.7 billion cash infusion from Kohlberg Kravis and the renegotiation of expensive bank loans. This recapitalization allowed RJR Nabisco to begin retiring the high-yield junk bonds that helped fund its buyout.
The next month, the company announced it was issuing its first post-buyout common stock and would swap the shares and cash for $750 million in junk bonds.
Kohlberg Kravis knew there was a market for post-LBO stock issues. They had already tested the waters by issuing 10 million shares of Safeway Stores Inc. in early 1990.
They were right. Wall Street was enthralled with the RJR Nabisco stock when it hit the New York Stock Exchange in February. The shares began trading at $5.50 each, climbed past $11 and set the third phase of the refinancing in motion.
In April, RJR Nabisco sold 115 million more common shares at $11.25 each for a total of $1.29 billion. It also sold $1.5 billion in bonds and used the proceeds of both sales to retire more of its expensive high-yield securities.
Then, in October, the company announced the fourth phase. It swapped common stock for expensive preferred stock, and issued another $1.8 billion in cheaper preferred shares, with the proceeds again going toward debt repayment.
Of the two series of junk bonds used in the buyout, one has been completely retired, with $5.3 billion in securities repurchased. The second has approximately $500 million in bonds still outstanding, while $1.86 billion have been bought back.
And from $12 billion in bank loans, the company has repaid or refinanced $8.5 billion, leaving about $3.5 billion outstanding.
All these steps - plus asset sales made soon after the buyout - brought RJR Nabisco's debt to just over $14 billion from a post-buyout high of $29 billion. They also allowed the firm to shed the stigma of a highly-leveraged company and saved it billions in interest costs.
The refinancing also returned RJR Nabisco to profitability much sooner than anyone expected.
Some companies taken private in other buyouts sagged under the weight of their debt. Southland Corp., Federated Department Stores Inc., Allied Stores Corp. and Doskocil Foods Co. ended up in bankruptcy court.
Kohlberg Kravis' timing was impeccable. They began their refinancing as debt, the darling of the past decade, was falling out of favor and the economy was weakening. While companies that had a lot of debt became suspect, RJR Nabisco managed to retain its good standing.
For example, R.H. Macy & Co. Inc. began selling stock after it ran into trouble with a disappointing Christms season in 1989. Kohlberg Kravis didn't wait for the problems to begin.
The success of the RJR Nabisco sale opened up opportunities for other debt- burdened companies to lighten their loads. There was a burst of reverse LBOs early in the year, with AnnTaylor Stores Inc., Caldor Corp., Filene's Basement Corp., other retailers taken private in the late 1980s, returning to public hands.
Other Kohlberg Kravis holdings also sold stock publicly for the first time since their buyouts: Duracell International Inc., Owens-Illinois Inc. and Stop and Shop Cos. And Safeway sold more common shares.
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