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    RJR Nabisco: A Leveraged Buyout

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    seth_tolev
    The document summarizes the evaluation of a potential leveraged buyout (LBO) of RJR Nabisco by KKR and management. It outlines the pre-bid, management, and KKR valuations of the company, finding management's to be highest at $134.24/share and KKR's to be $118.46/share. It then compares the management and KKR buyout bids, finding that while management's cash offer was higher, KKR's total offer of $112.67/share was superior due to lower debt levels and non-callable preferred shares. The committee recommends accepting KKR's offer.

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    RJR Nabisco: A Leveraged Buyout

    Uploaded by

    seth_tolev
    832 views16 pages
    The document summarizes the evaluation of a potential leveraged buyout (LBO) of RJR Nabisco by KKR and management. It outlines the pre-bid, management, and KKR valuations of the company, finding management's to be highest at $134.24/share and KKR's to be $118.46/share. It then compares the management and KKR buyout bids, finding that while management's cash offer was higher, KKR's total offer of $112.67/share was superior due to lower debt levels and non-callable preferred shares. The committee recommends accepting KKR's offer.

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    Sec1_group9_Nabsico

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    The document summarizes the evaluation of a potential leveraged buyout (LBO) of RJR Nabisco by KKR and management. It outlines the pre-bid, management, and KKR valuations of the company, finding management's to be highest at $134.24/share and KKR's to be $118.46/share. It then compares the management and KKR buyout bids, finding that while management's cash offer was higher, KKR's total offer of $112.67/share was superior due to lower debt levels and non-callable preferred shares. The committee recommends accepting KKR's offer.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    832 views16 pages

    RJR Nabisco: A Leveraged Buyout

    Uploaded by

    seth_tolev
    The document summarizes the evaluation of a potential leveraged buyout (LBO) of RJR Nabisco by KKR and management. It outlines the pre-bid, management, and KKR valuations of the company, finding management's to be highest at $134.24/share and KKR's to be $118.46/share. It then compares the management and KKR buyout bids, finding that while management's cash offer was higher, KKR's total offer of $112.67/share was superior due to lower debt levels and non-callable preferred shares. The committee recommends accepting KKR's offer.

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    RJR Nabisco

    A Leveraged Buyout

    Special Committee
    Leo Leung
    Aaron Ng
    Marcus Lam
    Jennie Liu
    Wendy Ma
    Agenda

    • LBO Evaluation
    • Value of Company
     Pre-bid
     Management
     KKR
    • Sources of Gains
    • Use of One-Round Auction
    • Bid Recommendation
    LBO Evaluation

    • Low debt level


    • Sufficient tangible assets
    • Steady growth of sales and stream of cash flows
    • Not a volatile industry
    • Little capital investment required
    • Undervalued

    n di d a t e
    o d Ca
    Go
    Pre-Bid Operating Strategy

    D E
    WACC  E ( rd )(1  t )  E ( re )
    DE DE

    • E(rd):
     1987 interest expense / debt level

    • E(re): CAPM
     Risk Free Rate: 10-year US T-Bills in 1989
     Market return: 1982 to 1987 NYSE annual return
     Beta: 1987 regression data
    Pre-Bid Operating Strategy

    5,204 11,133
    (.0940)(1  .34)  (.1451)  .1187
    5,204  11,133 5,204  11,133

    • Projected cash flows


     1989 to 1998: Cash flows available for capital payments
     Future growth after 1998: 3%
    Pre-Bid Operating Strategy

    • Present value of cash flows: $28,276


    • Current Debt: $5,204
    • Equity: $23,072
    • Number of Shares: 247.4
    • Value per Share: $93.26
    Management’s Operating Strategy

    D E
    WACC  E ( rd )(1  t )  E ( re )
    DE DE

    • E(rd)
     1989 to 1998 interest expense / avg. debt level

    • E(re): CAPM
     Risk Free Rate: 10-year US T-Bills in 1989
     Market return: 1982 to 1987 NYSE annual return
     Beta: 1987 regression data
    Management’s Operating Strategy

    11,186 4,202
    (.1276)(1  .34)  (.1517)  .1026
    11,186  4,202 11,186  4,202

    • Present value of cash flows: $34,512


    • Current Debt: $5,204
    • Equity: $29,308
    • Number of Shares: 247.4
    • Value per Share: $134.24
    KKR’s Operating Strategy

    18,932 4115
    (.1518)(1  .34)  (.1584)  .1106
    18,932  4115 18,932  4115

    • Present value of cash flows: $38,416


    • Current Debt: $5,204
    • Equity: $33,212
    • Number of Shares: 247.4
    • Value per Share: $118.46
    Sources of Gains
    • Pre-Bid
     From continuous operations
    • Management
     From continuous operations through better management
     Sale of food business
     Cost cutting & operational improvements
     Tax shields
    • KKR
     From continuous operations
     Sale of non-essential assets
     Cost cutting & operational improvements
     Tax Shields
    Use of One-Round Auction
    • Pros
     Forces bidders to deliver their most competitive offer
     Most time and cost efficient
     Bids are more comparable

    • Cons
     Does not allow for follow-up counter offers

    • Alternative
     Multiple-round auction
    Management Bid

    Not converted Converted


    Cash: $90 $90
    PIK preferred: $ 6 $ 6
    Convertible: $ 4 $18.26
    $100 $114.26

    @85% projected firm value: $111.52


    @115% projected firm value: $116.99
    Note: Convertible stock is callable by company
    KKR Bid

    Not converted Converted


    Cash: $75 $75
    PIK preferred: $ 11 $ 11
    Convertible: $ 8 $26.67
    $94 $112.67

    @85% projected firm value: $108.67


    @115% projected firm value: $116.67
    Value Comparison

    • Pre-Bid: $93.26
    • Management: $134.24
    • KKR: $118.46

    • Management Bid: $100.00


    • KKR Bid: $112.67
    Bid Recommendation
    Management
    KKR
    Value Higher Lower
    Equity Lower Higher
    O ff e r!
    Debt Higher ter
    BetLower
    PIK Lower Higher
    Callable Yes No
    Cash offer Higher Lower
    Total offer Lower Higher
    Questions?

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