The Rjr Nabisco He's Leaving Behind

Henry R. Kravis sighed with relief when he signed up Louis V. Gerstner Jr. in 1989 to run RJR Nabisco Holdings Corp. The $25 billion leveraged buyout of RJR was considered a triumph for Kohlberg Kravis Roberts & Co. But the company's balance sheet was an unqualified disaster, overloaded as it was with almost $30 billion in debt. Kravis was betting that Gerstner, fresh from the No.2 job at American Express Co., was just the sort of hardened manager who could cut the fat and get RJR humming.

Now, four years later, Gerstner is about to give up the helm of RJR, tempted away by IBM. And he is leaving behind a company that still owns a pantry full of daunting problems. True, he helped slash RJR's debt to about $14 billion, and RJR's food profits saw three straight years of gains.

The bad news: Cigarette consumption is declining. And while profits of its premium Camel brand remain fat, RJR's tobacco division is seeing overall margins squeezed by the huge growth of generic cigarettes. "It's not that I didn't think a lot of Gerstner, but the problems facing that company have yet to be addressed," says Mike Kennedy, senior analyst at IDS Securities, which owned 2.9 million shares of RJR as of December.

KEY MOVE. The immediate concern among investors is RJR's planned stock offering this spring. RJR and KKR plan to create a separate class of stock for the food division and expect to sell 25% of the new issue to the public, raising upwards of $1.7 billion. The deal still needs approval by the Securities & Exchange Commission. If it flies, RJR will use proceeds to buy back some of its still mountainous debt. More important, it will begin paying dividends in hopes of lifting its lagging stock, which closed at 8 on Mar. 24, down from a high of 12 1/4 soon after it was issued in early 1991. "Gerstner hasn't done much for [public] shareholders," gripes Leigh Ferst, an analyst at Prudential Securities Inc.

Big institutional investors already fret that the remaining core tobacco stock won't fare well. Most point to the prospect of a sin tax as high as $2 a cigarette pack to fund health care. Although embattled, RJR's tobacco franchise remains its cash cow, producing $2.1 billion of operating cash flow last year. A heavy consumer tax could crimp that at a time when RJR still needs the cash to pay down debt--a scenario that scares investors such as Greg Melvin. A portfolio manager at Federated Investors Inc., which holds 2 million RJR shares, he says: "The CEO is not the issue. Hillary [Rodham Clinton] is the issue."

Analysts worry that Gerstner's absence will only further unnerve investors. With that in mind, Wall Street believes KKR will move swiftly to name Gerstner's replacement. One possible candidate is H. John Greeniaus, who heads up the Nabisco food division. A longtime RJR executive, Greeniaus sided with KKR in its battle to take over the company. Another contender: RJR Chief Financial Officer Karl M. von der Heyden. Recruited by Gerstner from H.J. Heinz Co. in 1989, von der Heyden has earned high marks for cutting debt. Some RJR watchers, however, suggest he could end up joining Gerstner at IBM.

NO REGRETS? Headhunters are bandying about a Rolodex-ful of candidates for the top RJR spot--much as they did for IBM. There's Roger A. Enrico, chairman of PepsiCo Worldwide Foods, for one. Michael H. Jordan, ex-head of PepsiCo's international food and beverage division and now a principal at LBO firm Clayton & Dubilier Inc., also rates highly.

RJR could even go beyond a simple change, some speculate. Before its annual meeting en Apr. 2, it may announce a new management structure, possibly an "office of the chairman" with a mix of headquarters and operations people.

Perhaps RJR is ready for some change in the corner office. Gerstner, some consultants argue, is a challenge junkie at heart. With just 18 months to go before he completed his five-year strategy, few felt he would stay much beyond 1994. "Gerstner's job is already 99% done," says Roy D. Burry, an analyst at Kidder, Peabody & Co. "He got RJR restructured, refinanced. Now, it's ready to be run by a marketer, an operator who knows the tobacco business worldwide. Gerstner was perfect for the past and wrong for the future of this company." Time now for a new Mr. Right.

      -- Raised $6 billion selling off Del Monte, Nabisco-Europe, and other food 
      -- Cut $29 billion debt load in half 
      -- Eliminated 3,000 jobs, saving $550 million a year 
      -- Halted slide in U.S. cigarette market share at 29%
      -- Profit growth in domestic food business is flat
      -- Tobacco profits are declining; new taxes may hit demand 
      -- Smoker liability fights loom
      -- Offering of separate shares in food and tobacco units pending
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