A Big Thanks But No Thanks To Rjr Nabisco

Oh, never mind. Basically, that's what RJR Nabisco Holdings Corp. seemed to say on June 23 when it pulled the plug on its long-planned $1.7 billion offering of stock tied to its food business. "This would have been a `nice-to-do' transaction, but it wasn't a `need-to-do' transaction," says an RJR spokesman. "It's not like we're so aggressively leveraged as we were a few years ago."

That's true. But that doesn't mean RJR's troubles are over or that it isn't disappointed by its decision to pull the offering. Top executives at Kohlberg Kravis Roberts & Co., which owns 49% of RJR's stock, had been working on the offering since December. Their plan: split off Nabisco Foods Group from R.J. Reynolds Tobacco Co. in hopes of boosting the flagging fortunes of the holding company, which has seen its stock price fall 36% since January. R.J. Reynolds' earnings have been hurt by a brutal cigarette price war since early April and uncertainty over tobacco liability.

But investors weren't buying it--at least not at KKR's price. Instead of the $17 to $19 range KKR and RJR were shooting for, the offering wasn't expected to fetch more than $14 or $15 a share. That price would have been only 12.5 times estimated 1993 earnings of $1.20, just barely ahead of the 12 times earnings that the entire company trades at now, says Standard & Poor's Corp. analyst Robert Natale.

What snuffed out demand? A lot. The complicated spin-off of Nabisco stock was rife with red flags for some investors because it wasn't going to be an independent company. "The main problem I had with this deal was that you weren't buying true ownership in the company," gripes Arthur Cecil, a T. Rowe Price analyst. "You weren't going to be able to call up management and say, `Hey, let's do it this way!' because they'd still be working for the people who ran the tobacco company."

BIG CHARGE. Another problem: The KKR executives who devised the deal had lumped the lion's share of costs related to their 1989 acquisition of the food/tobacco giant onto the balance sheet of the tobacco business. RJR Nabisco must take an annual noncash charge of roughly $600 million to amortize the goodwill created when KKR bought the company for $21.7 billion more than its book value. That premium must be amortized over 40 years to satisfy accounting rules.

Had the offering gone through, Nabisco's goodwill amortization expense would have been $206 million--roughly half the $404 million charge carried by the tobacco business. The result: "Nabisco Foods' earnings were overstated," says Cecil. Adds another analyst: "There were a lot of shenanigans involved with this deal."

In the days leading up to June 24, when the stock was to begin trading, demand for it at the planned offering price was tepid. On the morning of June 23, new RJR Nabisco Chief Executive Charles "Mike" Harper and KKR partners Henry R. Kravis and George R. Roberts decided to scuttle the deal. KKR and RJR "concluded that Nabisco was too good a company to sell at [$14-$15]," says a source close to the deal. Meanwhile, a lot of people wish that KKR had never bothered at all. "I'd love to see their bills from lawyers and investment bankers from this aborted deal," says Ellen G. Baras, a fixed-income analyst at Duff & Phelps/MCM Investment Research Co. "They could have promoted a lot of cigarettes with that money."

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