KKR → RJR Nabisco
The takeover contest that came to define the 1980s buyout boom: KKR beat RJR Nabisco's own chief executive for control of the tobacco and food group, then spent years working off the debt and lost money on the largest leveraged buyout of its era.
A $109-a-share leveraged buyout worth about $31bn including debt, the largest LBO for 17 years and the subject of Barbarians at the Gate.
- Value
- $25B
- Announced
- November 1988
- Completed
- February 1989
- Sector
- Consumer
- Deal type
- take-private
- Acquirer
- KKR (United States)
- Target
- RJR Nabisco (United States)
Why it mattered
RJR Nabisco was formed in 1985 when Nabisco Brands merged with R.J. Reynolds Tobacco. In October 1988 its chief executive, F. Ross Johnson, proposed a management buyout at $75 a share, about $17bn, backed by Shearson Lehman Hutton and its parent, American Express. Henry Kravis, who had first suggested a buyout to Johnson, answered days later with a $90-a-share offer worth $20.3bn, financed with an aggressive debt package and equity from pension funds and university endowments. Forstmann Little tried to assemble a rival consortium but never made a final bid.
In the last round, at the end of November, Johnson's group offered $112 and KKR $109. The board chose KKR: its offer was guaranteed, while management's lacked a "reset", so its final value might have fallen short of $112, and disclosures about Johnson's golden parachute had turned opinion against him — Time put him on its cover under the headline "A Game of Greed". Some observers thought the reset issue was an excuse to reject the higher bid. KKR's acquisition vehicle bought control on 9 February 1989, and the acquisition was completed on 28 April.
What it left behind
Chronicled in the book Barbarians at the Gate, the deal came to be seen as the pre-eminent example of corporate greed, and its $31.1bn transaction value was not surpassed in nominal terms until 2006–07. The debt proved harder than the auction. KKR, whose original equity was only $1.5bn, sold Del Monte Foods in 1990, put in $1.7bn of new equity in a 1990 recapitalisation and floated RJR again in 1991, after which its debt was upgraded from junk to investment grade. KKR used RJR shares to help pay for Borden in 1994 and sold its last RJR stock in 1995; by the time it sold Borden Chemical, the final remnant, in 2004, the investment had lost about $700m. RJR Nabisco itself was dismantled: in 1999 the international tobacco business went to Japan Tobacco and the US tobacco company was spun off, and in 2000 Philip Morris bought Nabisco, now part of Mondelēz.
Winning an auction and making money are different contests: the price that beat management left KKR working off debt for years, and it afterwards pledged never again to commit so much of a fund to one investment.