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Management Considering Buyout of RJR Nabisco

October 20, 1988

ATLANTA (AP) _ Food and tobacco giant RJR Nabisco Inc. said Thursday some of its top executives were considering taking the company private in a leveraged buyout valued at nearly $17 billion, which would be the largest corporate acquisition in history.

The company, known for products that include Camel and Winston cigarettes, Oreo cookies and Ritz crackers, also announced a 10.9 percent increase in its third-quarter income.

The announcement of the possible $75-a-share offer - which came in the midst of takeover activity involving other big food companies - sent RJR Nabisco’s stock price soaring, but it also left investment analysts puzzled about the purpose and price of the proposal.

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

The company said the group was considering offering about $75 in cash for each of the company’s approximately 225 million common shares outstanding, making the proposal worth about $16.88 billion.

Shearson Lehman Hutton Inc. said it was advising the management group and would provide equity and financing for the deal.

Analysts said the proposal was too low, and investors apparently agreed. RJR Nabisco stock surged $21.37 1/2 a share to $77.25 on the New York Stock Exchange, where it was the most actively traded issue.

″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.

″I’m telling our clients to hold on to the stocks. I think something else is going to happen,″ he said.

Lawrence Adelman, an analyst with Drexel Burnham Lambert Inc., said the deal was an indication of how undervalued RJR Nabisco’s stock was, having been driven lower by worries over recent tobacco liability lawsuits.

But Adelman said investors currently are paying more attention to companies’ ability to generate cash rather than provide earnings, and that makes companies with undervalued stocks especially attractive.

He said RJR Nabisco’s stock should trade at between $90 and $100 a share, and said Johnson, the company president, ″is trying to steal the company″ at $75 a share.

Thursday’s announcement moved Standard & Poor’s Corp., the credit rating service, to place RJR Nabisco on its ″creditwatch″ list because ″such a deal would severely weaken the firm’s balance sheet.″

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

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.

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

Analysts speculated the management group was motivated by concern that the company could become the target of another suitor.

The food industry has been awash with takeover bids. On Monday, Philip Morris Cos. Inc. offered to buy processed foods manufacturer Kraft Inc. for $11 billion, and Tuesday, Pillsbury Co. rejected a $5.23 billion bid from the British firm Grand Metropolitan PLC.

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.

The company’s products are some of the best-known in the country, and also include Salem cigarettes, Lorna Doone and Mallomar cookies, Chuckles and Junior Mints candy, Del Monte vegetables and Milk-Bone dog biscuits.

It 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.

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