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RJR Nabisco

Harvard Business School Case #289-056


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ness School.

Nabisco
Del Monte
Planters

$8
$3
$1.5

to
to
to

$9.5
$4
$2

billion
billion
billion

Total

$12.5

to

$15.5

billion

Exhibit 1 Composition of the Special Committee of the RJR Nabisco Board of Directors to Consider Offers
for the Company.
Committee Members:

Biographical Sketch

Charles E. Hugel, Chairman

Age 60; chairman of RJR


Nabisco; president and chief
executive officer of Combustion
Engineering, Inc.

750 shares

John D. Macomber, Vice Chairman

Age 60; chairman of


Lasertechnics; retired chairman
and chief executive officer of
Celanese Corporation

16,425 shares

Martin S. Davis

Age 61; chairman and CEO of


Gulf and Western, Inc.

1,000 shares

William S. Anderson

Age 69; retired chairman and


chief executive officer of the
Executive Committee of NCR
Corporation

1,500 shares

Albert L. Butler, Jr.

Age 70; president of Arista


Company; chairman of RJR
Nabiscos Organization,
Compensation, and Nominating
Committee

9,465 shares

Investment Bankers:
Dillon, Read & Co.
Lazard Freres, Inc.
Legal Counsel:
Skadden, Arps, Slate, Meagher and Flom
Young, Conaway, Stargatt and Taylor
Source: Casewriter.

Common Stock Ownership

Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in
millions of dollars, except per share data).
1982

1983

1984

1985

1986

$7,323
1,142
180
1,012
548
322
870

$7,565
1,205
177
1,110
626
255
881

$8,200
1,412
166
1,353
747
463
1,210

$11,622
1,949
337
1,663
917
84
1,001

$15,102
2,340
565
1,782
1,025
39
1,064

$15,766
2,304
489
1,816
1,081
128
1,209

$3.13
1.14
20.40
6.5x
281.5
0.80

$2.90
1.22
24.30
8.38x
283.2
0.70

$4.11
1.30
28.80
7.01x
258.4
0.74

$3.60
1.41
31.38
8.72x
250.6
1.21

$3.83
1.51
49.25
12.86x
250.4
1.24

$4.70
1.76
45.00
9.57x
247.4
0.67

Operations:
Revenues
Operating income
Interest and debt expense
Income before provision for income taxes
Income from continuing operations
Income from discontinued operationsa
Net income
Stockholder Information:
Earnings per share
Dividends per share
Closing stock price at year end
Price/earnings at year end
Numbers of shares at year end (millions)b
Betac

1987

Source: Company reports and Casewriter estimates.


a

Divestitures and acquisitions for the years 1982 to 1987 are as follows:

1982Heublein acquired for $1.36 billion.


1983Energy Division sold for an after-tax gain of $275 million.
1984Divestiture of transportation division completed by spinning off common stock to Sea-Land Corp. (transportation accounted for as a
discontinued operation since 1983).
1985Nabisco brands, Inc., acquired at a total cost of $4.9 billion.
1986Kentucky Fried Chicken sold at an after-tax loss of $39 million.
1987Heublein, Inc. sold at an after-tax gain of $215 million.
b

Figures include a 2 1/2-for-1 stock split, effective May 17, 1985.

Calculated using daily stock price data for each year by ordinary least-squares regression.

Exhibit 3

Consolidated Balance Sheets for RJR Nabisco, 1986-1987 (in millions of dollars).

Assets:
Cash
Net receivables
Inventories
Other current assets
Property, plant and equipment, net
Goodwill and other intangibles
Net assets of discontinued operations
Other assets
Total assets
Liabilities:
Notes payable
Accounts payable
Current portion of long-term debt
Income taxes payable
Long-term debt
Deferred income taxes
Redeemable preferred stock
Other noncurrent liabilities
Total liabilities
Stockholders equity
Total liabilities and stockholders equity

Source: Company reports.

1986

1987

$827
1,675
2,620
273
5,343
4,603
716
644
$16,701

$1,088
1,745
2,678
329
5,847
4,525
-649
$16,861

$518
2,923
423
202
4,833
751
291
1,448
$11,389
5,312
$16,701

$442
3,187
162
332
3,884
846
173
1,797
$10,823
6,038
$16,861

Exhibit 4

Financial Summary of RJR Nabisco by Business Segment, 1982-1987 (in millions of dollars).
1982

1983

1984

1985

1986

Tobacco:
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$4,822
1,187
3,219
81
238
36.9%
--

$4,807
1,150
3,378
78
383
34.0%
--

$5,178
1,305
3,812
107
527
34.2%
--

$5,422
1,483
4,496
146
647
33.0%
--

$5,866
1,659
4,882
205
613
34.0%
--

$6,346
1,821
5,208
244
433
35.0%
(261)

Food Products:
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$2,501
21
1,710
51
84
1.2%
--

$2,758
129
1,761
56
94
7.3%
--

$3,022
181
2,211
68
86
8.2%
--

$6,200
549
9,598
195
279
6.0%
--

$9,236
820
9,822
376
344
8.0%
--

$9,420
915
10,117
380
445
9.0%
18

Spirits and Wines:


Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$392
53
1,084
14
11
4.9%
--

$746
113
740
24
13
15.3%
--

$703
122
815
22
13
15.0%
--

$766
131
895
24
26
14.6%
--

$876
138
991
30
25
14.0%
--

Other (including corporate):a


Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$-(66)
3,106
11
16
-2.1%
--

$-(74)
3,197
16
15
-2.3%
--

$-(74)
2,257
16
29
-3.3%
--

$-(83)
1,684
13
20
-5.0%
--

Source: Company reports.


a

Includes earnings on cash and short-term investments and miscellaneous discontinued operations.

$-(139)
1,319
24
65
-10.5%
--

1987

$--------

$-(182)
1,536
28
58
-11.9%
(7)

Exhibit 5

Cash Flow Projections for RJR Nabisco Under Its Prebid Strategy, 1988-1998 (in millions of dollars).

Tobacco sales
Food sales
Total
Operating income
Tobacco
Food
Corporate
Total
Interest
Net income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Cash flow available for capital paymentsa

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,061
9,889
16,950

7,650
10,438
18,088

8,293
11,383
19,676

8,983
12,092
21,075

9,731
12,847
22,578

10,540
13,651
24,191

11,418
14,507
25,925

12,368
15,420
27,788

13,397
16,393
29,790

14,514
17,428
31,942

15,723
18,533
34,256

1,924
1,079
-350
2,653
551
1,360
730
1,142

2,022
1,163
-287
2,898
582
1,498
807
1,708
80
517

2,360
1,255
-279
3,336
662
1,730
791
1,462
111
948

2,786
1,348
-296
3,838
693
2,023
819
1,345
98
1,399

3,071
1,459
-314
4,216
690
2,259
849
930
105
2,073

3,386
1,581
-333
4,634
658
2,536
866
738
113
2,551

3,733
1,713
-353
5,093
594
2,858
867
735
121
2,869

4,115
1,855
-374
5,596
458
3,251
867
735
130
3,253

4,534
2,011
-396
6,149
410
3,625
867
735
140
3,617

4,998
2,178
-420
6,756
259
4,094
867
735
151
4,075

5,508
2,361
-445
7,424
-21
4,625
861
735
162
4,589

Source: Casewriter.
a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.

Exhibit 6
dollars).

Cash Flow and Capital Structure Projections for RJR Nabisco Under the Management Group Strategy, 1989-1998 (in millions of

Panel A: Operating Information


Sales
Operating income
Interest
Amortizationa
After-tax income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Net proceeds from asset sales
Cash flow available for capital paymentsb
Panel B: Capital Structure
Principal payments to:
Assumed debt
Bank debt
Subordinated debt
Preferred stock
Convertible preferred stock
Total
Year-end book values:
Assumed debt
Bank debt
Subordinated debt
Total
Preferred stock
Convertible preferred stock
Common stock
Total
Source: Casewriter.

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,650
1,917
2,792
388
-965
777
432
41
12,680
12,018

8,293
2,385
1,353
388
293
725
381
45
0
593

8,983
2,814
1,286
388
621
726
380
48
0
919

9,731
3,266
1,183
388
987
735
389
52
0
1,282

10,540
3,589
1,037
388
1,297
749
396
57
0
1,594

11,418
3,945
850
388
1,655
754
402
61
0
1,946

12,368
4,337
624
388
2,063
758
412
67
0
2,344

13,397
4,768
351
388
2,527
763
422
72
0
2,797

14,514
5,243
0
388
3,073
769
432
78
0
3,332

15,723
5,766
0
388
3,418
774
442
85
0
3,666

310
11,708
0
0
0
12,018

375
218
0
0
0
593

721
198
0
0
0
919

816
466
0
0
0
1,282

400
1,194
0
0
0
1,594

728
1,217
0
0
0
1,946

1,854
0
490
0
0
2,344

0
0
2,510
287
0
2,797

0
0
0
3,332
0
3,332

0
0
0
3,327
339
3,666

4,894
3,292
3,000
11,186
1,632
1,035
1,535
4,202

4,519
3,075
3,000
10,594
1,938
1,229
1,828
4,995

3,798
2,877
3,000
9,675
2,303
1,460
2,449
6,212

2,982
2,411
3,000
8,393
2,736
1,735
3,436
7,907

2,582
1,217
3,000
6,799
3,250
2,061
4,733
10,044

1,854
0
3,000
4,854
3,861
2,448
6,388
12,697

0
0
2,510
2,510
4,587
2,909
8,451
15,947

0
0
0
0
5,162
3,455
10,978
19,595

0
0
0
0
2,801
4,105
14,051
20,957

0
0
0
0
0
4,538
17,469
22,007

The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988.
The difference between the purchase price and book value is amortized over 40 years using the straight-line method.
a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds from asset
sales.
b

Exhibit 7

Cash Flow and Capital Structure Projections for RJR Nabisco Under KKR's Strategy, 1989-1998 (in millions of dollars).

Panel A: Operating Information


Tobacco sales
Food sales
Total
Operating income
Tobacco
Food
Corporate
Total
Interest expense
Amortizationa
After-tax income
Depreciation, amortization & deferred tax
Capital expenditures
Change in working capital
Noncash interest expense
Net proceeds from asset sales
Cash flow available for capital paymentsb
Panel B: Capital Structure
Principal payments to:
Assumed debt
Bank debt
Subordinated debt
Preferred stock
Total
Year-end book values:
Assumed debt
Bank debt
Subordinated debt
Converting debtc
Total
Preferred stock
Common stock

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,650
8,540
16,190

8,293
6,930
15,223

8,983
7,485
16,468

9,731
8,084
17,815

10,540
8,730
19,270

11,418
9,428
20,846

12,368
10,183
22,551

13,397
10,997
24,394

14,514
11,877
26,391

15,723
12,827
28,550

2,022
1,060
-219
2,862
2,754
388
-281
1,159
774
79
206
3,500
3,732

2,360
1,026
-158
3,228
2,341
388
233
991
556
84
237
2,700
3,521

2,786
1,191
-167
3,811
1,997
388
845
899
555
87
312
0
1,414

3,071
1,245
-176
4,140
1,888
388
1,134
907
572
94
366
0
1,740

3,386
1,307
-185
4,508
1,321
388
1,751
920
586
102
0
0
1,983

3,733
1,367
-194
4,906
1,088
388
2,168
924
598
110
0
0
2,383

4,115
1,430
-203
5,341
806
388
2,641
928
618
119
0
0
2,832

4,534
1,494
-213
5,815
487
388
3,164
933
638
129
0
0
3,330

4,998
1,561
-224
6,335
21
388
3,814
939
658
140
0
0
3,956

5,508
1,630
-235
6,902

310
3,422
0
0
3,732

375
3,146
0
0
3,521

721
693
0
0
1,414

816
924
0
0
1,740

400
1,583
0
0
1,983

400
1,983
0
0
2,383

2,182
629
21
0
2,832

0
0
3,330
0
3,330

0
0
149
3,806
3,956

0
0
0
4,319
4,319

2,582
2,612
3,500

2,182
0
0
629
0
0
3,500
3,470
149
0
0
0
6,311
3,470
149
6,636
7,883
9,365
7,320
9,844
12,485
15,648
19,463

4,894
4,519
3,798
2,982
8,958
5,812
5,119
4,195
3,500
3,500
3,500
3,500
1,580
1,817
2,129
2,495
18,932
15,648
14,546
13,172
2,896
3,331
3,958
4,702
1,219
1,452
2,297
3,430

0
8,694
5,586
7,676

0
388
4,203
945
678
151
0
0
4,319

0
0
0
0
0

0
0
0
0
0
4,377
23,666

Total

4,115

4,783

6,255

8,132

13,262

16,480

20,368

25,013

26,783

28,043

Source: Casewriter.
The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The
difference between the purchase price and the book value is amortized over 40 years using the straight-line method.
a

Cash flow available for capital payment = net income + noncash interest + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds
from asset sales.
b

Assumes converting to equity in 1993.

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