RJR NABISCO CASE STUDY HBS

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.

RJR Nabisco by david Perales on Prezi

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.

  AESTHETICA CREATIVE WRITING ANNUAL 2015

rjr nabisco case study hbs

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.

rjr nabisco case study hbs

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.

rjr nabisco case study hbs

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.

  RLSA CASE STUDY

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

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.

RJR NABISCO CASE STUDY HBS

Exhibit 5 gives projections of RJR Nabisco’s operating results for the years — They have also incorporated that whoever is bidding for the food segment should also tell the. 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. Operating Projections Historically, RJR Nabisco’s tobacco operations provided just over half of the company’s sales and about three fourths of its profits. Kohlberg had done his first LBO in Listed on the New York Stock Exchange.

The projections show there being ample cash available to make required debt repayments in and Nabisco will have to pay less interest if they continue its operations. With just a few weeks until closing, the sellers asked to renegotiate the terms of the seller note that had been agreed to early in the acquisition process. After the equity of Holdings, the most junior securities were the Senior Converting Debentures followed by the Exchange Debentures. In March, , there were 31 product liability cases pending against RJR; compared to 97, 69, and 48 such cases at the end of , , and , respectively.

RJR case_图文_百度文库

There was considerable speculation as to how KKR might try to deal with the reset problem, the resolution of which had now become intertwined with the bridge loan refinancing. Callable at par at any time. Importantly, the banks’ reach extended upward to Group and Holdings.

rjr nabisco case study hbs

Gbs other actions should the special committee take? Its debt to equity ratio is. They have incorporated another condition to secure the rights of the share holders that the sale.

For example, without the banks’ permission, funds raised through an equity issue by Holdings could not be used to buy back junior debt.

  BACHELOR OF ARTS CREATIVE WRITING UOW

Tobacco revenue was projected to grow at 8. As events unfolded, the more aggressive strategy prevailed.

RJR Nabisco Harvard Case Solution & Analysis

It therefore asked for a sealed bid, thus discouraging alliances between groups. 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. The KKR also incorporated high interest rate in the valuation of the.

The board asked interested bidders to submit two bids one for the whole company and one for the tobacco business only. These are the costs of the agent who arrange the buyer of the business for the seller. If Holdings’ financial advisors, on the one hand, and Dillon and Lazard, on the other hand, are unable to agree on the Fixed Rate within three business days, Holdings’ financial advisors, on the one hand, and Dillon and Lazard, on the other hand, shall appoint an independent nationally recognized investment bank to determine the Fixed Rate and such determination by such bank shall be final.

He identified ways to grow sales through changes in the composition and structure of the sales force and to improve margins through managing costs.

If the conversion occurs, the bondholders forego the right to the interest accrued on the debentures.

rjr nabisco case study hbs

RJR Nabicso is valued at different work strategies and source of income by borrowing emphasized. The board’s five-person special committee wanted to provide existing share- holders with an option to participate in the buyout and thus share in any future KKR profits from the transaction. The ztudy provisions of the two bonds were essentially identical and, prior to reset, the two bonds would pay the same interest rate. Assumed interest rates are consistent with the operating projections.

  DISSERTATION RUY BLAS DRAME ROMANTIQUE

First, the firm could try to raise external funds and repurchase all or a portion of the PIK reset bonds.

rjr nabisco case study hbs

Ruback and Royce Yudkoff. However, this was one of KKR’s least attractive alternatives, since its strategy was to develop rather than liquidate RJR’s major food businesses.

First maturity inbut can be extended each year for one year up to final maturity in While KKR proposed to distribute 25 percent of the equity in the future company to existing shareholders, the management group offer included only 15 per cent.

RJR Nabisco is a. Bondholder Litigation When news broke of F. The December 31, balance sheet, revised in the April 5, KKR proxy statement to stockholders to show the projected result of the leveraged buyout.

RJR Nabisco

Perold as the basis for class discussion rather that to illustrate either effective or ineffective handling of an administrative nabisvo. While KKR did etudy promise such returns in the future, investors clearly hoped such would be the case. Food sales were forecast to grow at 8. None other assets of RJR will be sold. Analysts thought RJR would be within this 1: 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.