Case Study Nabisco Essay

1371 Words Oct 14th, 2013 6 Pages
Case Study: RJR Nabisco

July 20, 2013

One of the most famous leveraged buyouts (LBOs) that have has been studied is the RJR Nabisco LBO. There was also a movie made about this LBO entitled Barbarians at the Gate, which you may be interested in watching.

Review this case study in Chapter 7 of your text and conduct your own research. In a 3–4-page case study, address the following:
1. Discuss the background of the case. Who were the players? What prompted this leveraged buyout (LBO)?
2. What made this LBO feasible?
3. Discuss the terms and conditions of the LBO in terms of both pre-LBO and post-LBO corporate structure.
4. Discuss the financial qualities of the LBO in terms of the stock value
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That is, the cash flow from tobacco business made it stable and predictable and didn’t vary as much. RJR was the manufactured for very popular brand in its food division which is the Oreo. Moreover, RJR Nabisco also had low debt levels. On contrary, return on assets was declining, as well as falling inventory turnover.
According to the movie “Barbarians at the gate” RJR was supposed to launch a new brand of cigarettes. Hence, some demonstrations showed that the product will not succeeded and consumers didn’t care much about the product. As well, RJR Nabisco has already spent over $350 million in research and development for creation of this new tobacco product. Company did anticipated that the company would receive negative reaction on the stock with the introduction of a new cigarettes product. Ross Johnson, CEO for RJR Nabisco at that time, including some other upper executives had access to the information that the market had not yet received, and therefore decided to take company privately and avoid negative market reaction. Furthermore, going private with the company, management would have more control over the company and eliminate control of the shareholders. As well, RJR Nabisco would not have to worry about the stock price and could focus on the production of the tobacco and food products.
The combination of high valued products from tobacco and food group “gave the company a high breakup value that Smith Barney estimated to be in $85-$92 per share range

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