The rate must be in the range of It played an active role in structuring the bidding rules, monitoring and adjusting the bidding process, and choosing the winning bid. Transforming a complex set of financing instruments into a simple estimate of the cost of capital requires many approximations and simplifications. Gives students the opportunity to explore the issues facing the board of directors in leveraged buyout. KKR also believed it could insulate the company and itself from legal liability by selling the Jim Walter holding company and thereby rid itself of the problematic Celotex subsidiary, while retaining the operating assets under the newly-organized Hillsborough Holdings Corporation. Technology and Operations Management. Assumed interest rates are consistent with the operating projections.
Food sales were forecast to grow at 8. As noted above, cigarette shipments in the U. The sellers asked for personal guarantees from the individual investors, something Medoff knew his investors would not agree to. The relatively optimistic outlook for RJR’s tobacco businesses was not without considerable uncertainty. So, the increase in interest and reduction in.
The case, still undecided as of March,rested on certain “negative pledge” covenants in the bond indentures that required that the bonds to rur secured “equally and ratably” with other lenders, including the banks. These bonds carried a provision which stipulated that the interest coupon would be reset studh December, so that the bonds would trade at slightly above par. Transforming a complex set of financing instruments into a simple estimate of the cost of capital requires many approximations and simplifications.
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On a purely monetary basis, the two offers were very dose; the final decision was based on other factors. Due in 16 quarterly installment payments beginning in May Gives students the opportunity to explore the issues facing the board of directors in leveraged buyout.
Nabjsco many of the reset bonds would have to be repurchased was not obvious. As events unfolded, the more aggressive strategy prevailed. On or prior to April 28,RJR must set a fixed rate to maturity on the debentures.
Already there was a complete ban on smoking on domestic flights, and numerous state laws were restricting smoking in the work place. The RJR Nabisco should select the highest bid by considering the easy payment method.
The following factors led to the ultimate victory of KKR’s lower bid.
Callable at a small premium to rjg on any interest payment date. In the spring ofRJR was in compliance with all such covenants and no violation of same appeared imminent.
In addition, the board was concerned that, because of the size of the caee, some of the bidders would cooperate rather than compete with each other. Indentures required that on or before April 28,RJR reset the rate so that the bonds would trade at par see Exhibit 1.
LIBOR plus basis points. So, the increase in interest and reduction in.
RJR Nabisco Harvard Case Solution & Analysis
Many participants in the fund had invested money with KKR since the beginning of the decade. But RJR Nabisco is. To avoid this, RJR’s board emphasized that it would not allow potential bidders to “pre-sell” businesses that is, obtain commitments in advance to divest themselves of the company’s businesses.
Kohlberg had done his first LBO in Keeping its options open, KKR did not disclose its studj plans.
With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan.
KKR first attracted serious notice in when it took Houdaille Industries, the firm’s first major New York Stock Exchange-listed company, private in a leveraged buyout. What other actions should the special committee rje Plaintiffs’ arguments, by and large, fell into two general camps: Cash interest payable quarterly.
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. Nabisco will have to pay less interest if they continue its operations. 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.
RJR Nabisco is a. With respect to the reset provision however, KKR faced a richer array of alternatives, although just about any financial restructuring would require the consent of the banks in view of the tight restrictions imposed by the Credit Agreement discussed below.
Exhibit 1 details the composition of long-term debt, including initial amounts issued with respect to buyout-related debt and amounts outstanding on March 31, Listed on the NYSE.