Rjr Nabisco Case Study

1. Henry Kravis is a successful businessman and an American billionaire. He is a cofounder of firm Kohlberg Kravis Roberts (KKR), a private equity firm with about $94.3 billion in asset in 2013. (Wikipedia) He was born in 1944 and his father was a successful petroleum engineer. He studied economics, moved to New York, and worked in finance field. He went back to school in 1967 and enrolled in Columbia’s MBA program. He began to join partners at Bear Steams with his cousin George Roberts in the late 1960s and early 1970s. Henry Kravis and George Robert were two great corporate finance managers. They made a deal called bootstrapping that is known as a leveraged buyout. Then, George Roberts and he left Bear Steams and established their own firm …show more content…
From the article “RJR Nabisco: A Case Study of a Complex Leveraged Buyout”, it illustrated the RJR transaction through the RJRs’ history, examination and valuation of the company, and relating the role of the board in the winning bid. RJRs had tobacco and food operation. Regarding the food operation, it operated the food with cheap brands. Regarding the tobacco operation, it was hurt from the health concerning. The risks associated with LBO in RJR deal with high growth and inconsistent growth. It is needed to have a large investment of the working capital. Also, it deals with a low beta of 0.69 which was a very high risk for the firm. The growth rate of the food operations was a lot lower compare to tobacco. The RJR firm had low capital expenditures and low debt level. However, the firm could save a lot of money on the high technology that needed to have a large R&D commitment to remain competitive. Also, the firm had a low debt level that was an opportunity for management to looks for low debt in the target firm. There were some studies about the LBO target firm, which often exhibit higher debt levels when their non-target. The high debt over equity ratio caused the bonds issued to support the acquisitions as a junk bonds. The interest payments were very large with this high leverage ratios that the firm’s cash flows were not able to pay the debt. The interest rates usually low when the LBO activity increase which is more competition for deals and tends to increase the premiums paid for target. The risk and the debt of an expensive acquisitions rising will not able to support its large debt obligations. RJRs’ LBO financing structure is pretty much complex that the they were only able to estimated. Though, its complex financial structure transformed the company into a simple estimate of the capital cost. The RJR buyout is model example for many companies in the bidding process that can impart of its outcome. Overall, the LBO is the opportunities to make money.