RJR Nabisco case study
Summary of the Case
RJR Nabisco was an American conglomerate selling tobacco and food products. It was formed in the year 1985 by the merger of Nabisco Brands and R J Reynolds Tobacco Company. The case given discusses the leveraged buy out of the company, which was at that time the largest LBO in history. A leveraged buyout can be defined as a situation where an investor group, which often includes some of the target company’s top managers, borrows billions to try to take the company private by buying its stock from the shareholders.
In October 1988, the share price of RJR Nabisco stood at $55.87 per share. Even though the company was doing well, the share price remained largely under valued. The rising public awareness regarding the ill effects of smoking had raised concerns about the future of the tobacco industry. Nonetheless, the RJR had consistent growth and low debt ratio, making it a prime target for a buyout.
F. Ross Johnson, CEO of RJR Nabisco, feared the share price would go down even further if their new product, Premier, failed. He and the Management group offered to take the company private by offering a share buyout price of $75 per share. The opposition to Johnson's bid for the company was made by KKR, one of the pioneers of the leveraged buyout. KKR offered a whopping $90 per share to takeover the company.
Both the Management group and KKR made different projects of the future cash flows based on their financing as well as sale of asset strategy. The Management group planned to sell the food assets of the company whereas KKR intended to keep them.
The following are the Valuations of the company based on the Prebid cash flows, Management Group strategy as well as the KKR group. We use the Capital cash flow method to arrive at the expected share price under each evaluation.
We use the capital cash flow method to arrive at the valuation primarily because of the fluctuating levels of debt in each scenario. With this approach we discount the
RJR Nabisco was an American conglomerate selling tobacco and food products. It was formed in the year 1985 by the merger of Nabisco Brands and R J Reynolds Tobacco Company. The case given discusses the leveraged buy out of the company, which was at that time the largest LBO in history. A leveraged buyout can be defined as a situation where an investor group, which often includes some of the target company’s top managers, borrows billions to try to take the company private by buying its stock from the shareholders.
In October 1988, the share price of RJR Nabisco stood at $55.87 per share. Even though the company was doing well, the share price remained largely under valued. The rising public awareness regarding the ill effects of smoking had raised concerns about the future of the tobacco industry. Nonetheless, the RJR had consistent growth and low debt ratio, making it a prime target for a buyout.
F. Ross Johnson, CEO of RJR Nabisco, feared the share price would go down even further if their new product, Premier, failed. He and the Management group offered to take the company private by offering a share buyout price of $75 per share. The opposition to Johnson's bid for the company was made by KKR, one of the pioneers of the leveraged buyout. KKR offered a whopping $90 per share to takeover the company.
Both the Management group and KKR made different projects of the future cash flows based on their financing as well as sale of asset strategy. The Management group planned to sell the food assets of the company whereas KKR intended to keep them.
The following are the Valuations of the company based on the Prebid cash flows, Management Group strategy as well as the KKR group. We use the Capital cash flow method to arrive at the expected share price under each evaluation.
We use the capital cash flow method to arrive at the valuation primarily because of the fluctuating levels of debt in each scenario. With this approach we discount the