RJR NABISCO CASE STUDY HBS

After receiving unexpected bid, board of directors typically makes an announcement that the offer “does not serve shareholders’ best interests. It therefore asked for a sealed bid, thus discouraging alliances between groups. The market obviously saw substantial risk that the reset would fail, which would put RJR in violation of its bond covenants. The majority of the existing debt was secured “equally and ratably” with the bank debt, while some existing debt was actually junior to the banks’ claims. After the equity of Holdings, the most junior securities were the Senior Converting Debentures followed by the Exchange Debentures. Business and Environment Business History Entrepreneurship.

RJR Nabisco is valued under different operating strategies and the source of gains in leveraged buyouts is stressed. As a third possibility, KKR could try to renegotiate the terms of the reset bonds or give holders the opportunity to exchange their bonds for equity and other securities. He identified ways to grow sales through changes in the composition and structure of the sales force and to improve margins through managing costs. On the surface, it seemed like a risky strategy, which could scare off all the bidding groups. He had been in these positions in the s and early s and was known for emphasizing the company’s responsibility to stakeholders primarily employees and communities. The balance sheets on December 31, and March 31, are those of the consolidated entity. Upon election to extend maturity, interest rate must be reset to obtain a bid value of , but must be in the range of

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All three had left Bear Stearns where they had been doing “bootstrap” as in “pull yourself up hbd your bootstraps” financings, the name given to leveraged buyouts back then. Assumed interest rates are consistent with the operating projections.

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Reportedly, KKR did not think the plaintiffs would prevail. Dwarfing its predecessors, the fund attracted particular media attention: Transforming a complex set of financing instruments into a simple estimate of the cost of capital requires many approximations and simplifications. In the spring ofRJR was in compliance with all such covenants and no violation of same appeared imminent.

With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan. The reset provisions of the two bonds were essentially identical and, prior to reset, the two bonds would pay the same cae rate.

The debentures must at some point be reset to a fixed rate to maturity. Domestic and International Remaining liquidation value Dollars in millions. So, in they will be able to earn revenue. Gives students atudy opportunity to explore the issues facing the board of directors in leveraged buyout. Cite View Details Purchase Studg.

KKR had more or less free reign over how the funds could be invested.

rjr nabisco case study hbs

The sellers asked for personal guarantees from the individual investors, something Medoff knew his investors hbw not agree to. Interest rate variable at the greater of 50 basis points over the IRN rate see above or an increasing spread over time over the rate on the 7 year treasury note.

rjr nabisco case study hbs

In subsequent years, KKR obtained ever greater commitments from its growing stable of investors. The board’s five-person special committee nabieco to provide existing share- holders with an option to participate in the buyout and thus share in any future KKR profits from the transaction. Subordinated Extendible Reset Debentures due The rate must be in the range of So, the increase in interest and reduction in.

RJR Nabisco

Any of the above approaches would have the effect of reducing or eliminating the number of reset bonds outstanding. An often mentioned source of money was KKR’s LBO fund, which still had several billion dollars available for investments described more fully below.

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Many participants stury the fund had invested money with KKR since the beginning of the decade. The relatively optimistic outlook for RJR’s tobacco businesses was not without considerable uncertainty. Thus far, RJR and other tobacco companies had been quite successful in defending themselves in such lawsuits. HNNC was owned and run by a husband and wife eager to sell for personal reasons. Alternatively, the management group proposed to let F. The board defined its task not as just getting stuy best immediate price for RJR, but as ensuring that shareholders did not get locked out of possible future gains.

Thus far, KKR had liquidated many of its earlier investments within three to seven years of making them. While KKR promised to keep the tobacco naibsco most of the food business intact, the management group planned to keep only the tobacco business see Table Z.

Its debt to equity ratio is. Finance Globalization Health Care. KKR quickly read the board’s mind and announced nahisco plan to install J.

On or prior to April 28,RJR must set a fixed rate to maturity on the debentures. Failure-to-warn cases focused on the years prior to when federal law began to require that consumer warnings be printed on cigarette packaging.