Rjr Nabisco Case Study

Case #2 - RJR Nabisco 

1. It appears that KKR is willing to pay a lot more for RJR than the value of RJR before the takeover contest. What are the potential sources of this value gain?  

The value of RJR Nabisco was undervalued a lot at that time. This was agreed both by KKR and the management group. That is why they decided to bid for RJR. The tobacco and food businesses of RJR can create long-term and stable cash flows. After the successful buyout of RJR, the new management took actions to reform the company, selling out some equipments, improving productivity, and cutting costs greatly. They think that new running strategy will improve the status of RJR Nabisco, making the company be correctly valued by market.

2. How would you go about quantifying the relative size of each of these gains?

Referring to the Exhibit 5-7 in HBS cases, we can study the cash flow and capital structure for RJR Nabisco under the two different strategies of the management group and KKR. Unlike the management group who wants to sell all food businesses, KKR plans to keep a significant portion of food division. The total sales under KKR’s strategy would be larger than those under the management group’s strategy. Using these money, KKR pays its debts and its year-end book values would reaches 0 at 1997.

Assuming discount rate=12%, the following table calculates the present value of cash flow available for capital payments under KKR’s strategy (in millions of dollars).

Year | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 |

Cash flow available for capital payments | $3,732.00 | $3,521.00 | $1,414.00 | $1,740.00 | $1,983.00 | $2,383.00 | $2,832.00 | $3,330.00 | $3,956.00 | $4,319.00 |

Present Value (1988 as Date 0) | $3,332.14 | $2,806.92 | $1,006.46 | $1,105.80 | $1,125.21 | $1,207.30 | $1,281.05 | $1,344.93 | $1,426.57 | $1,390.60 |

Total of Present Value | $16,026.99 | | | | | | | | | |

According to HBS case material, the cash...