Buy-out of biggest kind

Press, 7 December 1988, Page 52

Buy-out of biggest kind

RICHARD SATRAN

NZPA-Reuter New York

Many people thought tobacco and food group, RJR Nabisco Inc, was too big to be taken over. But last week’s victory by Kohlberg Kravis Roberts and Co in a deal valuing RJR at $U524.74 billion ($NZ37.77 billion), the biggest ever corporate takeover, could herald a wave of similar large deals, financial analysts say.

“After investors regroup from this one, you’re going to see more and even bigger buyouts,” said Michael Metz, of Oppenheimer and Co. “The business is too lucrative for it to just end.” Until recently a deal as big as RJR’s was thought too risky to complete, but Kohlberg Kravis, a New York-based company

which pioneered the leveraged buy-out, has blazed a trail.

“Most people reasonably thought that RJR Nabisco was too big to be taken over,” said Alan Bromberg, a securities law expert at Southern Methodist University. In a leveraged buy-out, a group of investors puts up a small amount of money and borrows up to 10 times that amount to buy the company stock. The new owners repay the debt by selling off chunks of the company.

A few months ago, after Kohlberg Kravis failed to win a string of proposed buy-outs, many predicted that a scarcity of companies wanting to be bought would force, the firm to abandon its usually friendly approach and become a hostile pre-

Kohlberg Kravis, instead, aimed higher and went after RJR Nabisco, whose products include breakfast cereals. The takeover was roughly twice the size of the next biggest merger, the SUSI 3.4 billion (SNZ2O.S billion) 1984 takeover of Gulf Corp by Chevron, and four times any previous similar transaction. The debt needed to take over RJR Nabisco amounts to the largest issue of private securities in history. The corporate bond market has been shaken by the financing. “The borrowing demand from the deal is going to push interest rates higher,” said Allen Sinai of The Boston Co, an economic consulting company.

The takeover of At-lanta-based RJR Nabisco has drawn Washington’s attention, where many legislators are eager to seek tighter restrictions on risky borrowing for mergers.

The Kohlberg Kravis takeovers, though friendly, are similar in technique to those made by more abrasive operators. Assets are bought and sold, divisions pruned, factories and stores shut. It works patiently and carefully. The firm is headed by Henry Kravis in New York, and his cousin George Roberts, who works from Los Angeles. The Kohlberg in the firm’s title is Jerome Kohlberg, jun. The three worked together at financial group, Bear Stearns and Co, before striking ' out on their own in 1976. Kohlberg believed the key to buy-outs was to

motivate managers by an increased stake in a private company. His philosophy was to acquire only those companies where the full participation of top managers could be lined up. Kohlberg Kravis has defied predictions it would turn to making hostile takeover bids, particularly since Kohlberg’s departure last year. Kohlberg Kravis won over RJR’s board even though its final offer was SUS6SO million less than one made by a group of employees headed by RJR chief executive, F. Ross Johnson.

He was seen by his own board almost as a hostile outsider, arguing for a SUSI 7 billion buy-out that would have enriched him and executives at shareholders’ expense. The board was said to have been embarrassed by the proposal’s publicity.

“Johnson lost credibility,” said one takeover analyst. “KKR played their hand better. Told them what they wanted to hear — the company would be well-managed, financially secure, workers would keep their benefits. They made a lot of promises.”