In 1988,, the decade of “Greed is good”, snack and tobacco producer RJR Nabisco turned private when it was bought out by KKR & Co for $25.1 billion. Still ranked as one of the largest ever LBOs, it brought the world of Private Equity to the front pages and was immortalized by the book “Barbarians at the Gate” and the subsequent movie in 1993.
The title of the book comes from a statement by F. Ross Johnson, the CEO of RJR Nabisco, in which he calls KKR, founded by George R. Roberts, Jerome Kohlberg and first cousin Henry Kravis, money “phoney junk bond crap” and declares him and his cousin as “real people with real money,” also stating that to stop raiders like Kravis: “We need to push the barbarians back from the city gates.”
After a titanic 6 week battle involving most of Wall Street’s heavy weights, KKR emerged victorious with a $109 per share takeover.
Members of the Kohlberg, Kravis, Robert Company team who did the bidding for R.J. Nabisco.
From left are: Richard I. Beattie, chief lawyer in the negotiations; George R. Roberts and Henry R. Kravitz, the firm’s senior partners; and Paul E. Raether, a partner. Images may be subject to copyright.
Even though Ross Johnson, RJR’s CEO had lost, he resigned as chief executive three months later with a severance package worth around $50 million.
The LBO in numbers
KKR only invested 1/1666 of its own cash into the deal and used investor cash and debt to finance the mega-deal.
The deal was made up of $1.5 billion from a KKR partnership pool of Limited partners, $5 billion short term bridge loan issued by Merrill Lynch and Drexel Burnham Lambert to be repaid by issuing Junk bonds, $13 billion borrowed from a group of major banks and $4.5 billion of previous RJR Debt, a total debt of $22.8 billion.
The agreed $109 per share takeover offer was split up into $81 was in cash paid by all the new $18 billion of debt, Preferred stock valued at $18 per share and Convertible securities valued at $10 a share.
All this debt was to be serviced by the positive cash flow generated by RJR but left the newly owned company showing equity of $7.4 billion and debt of $22.8 billion, or a 3-to-1 debt-to-equity ratio.
How it all panned out
In 1991 KKR IPO’d RJR, after an initial surge the stock price went down and KKR had not been able to offload its holding.
In 1995 KKR eventually unloaded their RJR Nabisco for ownership of Borden Inc. another heavily indebted company, it was sold off piece by piece and in 2004 the last remaining part, Borden Chemical, was sold to Apollo for $649 million, financed with $550 million of debt.
It took 15 years to unwind the transaction, with many deals along the way and fees layered in at every point.
For the investors from the KKR partnership pool a total of $730 million on the RJR Nabisco and Borden investments was lost, for KKR, with a $75 million fee collected on the RJR takeover, its tiny exposure yielded a handsome profit and more fees on top of fees.