Case Study : Reynolds Tobacco Company

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In 1988, a battle began for control of the corporate giant, RJR Nabisco. RJR Nabisco (RJR) was established in 1985 with the merger of Nabisco Brands, an American food manufacturer and R.J. Reynolds Tobacco Company (Bozman, 1987). RJR Nabisco was acquired by Kohlberg Kravis Roberts & Co. (KKR), an American multinational private equity firm, which was the largest leveraged buyout to date at that time.
How did this leveraged buyout come about? RJR Nabisco was a conglomerate with divisions in two very different industries, tobacco and food. In the tobacco division, RJR was producing several incredibly popular cigarettes, such as Camel. Its food division was generating some popular brands as well, such as, Oreo and Ritz Crackers. Prior to the leveraged buyout pricing war, the company was not doing as well as anticipated. The company endured a massive blow during the 1987 stock market crash, with stock prices plummeting from nearly $70 per share to the low $40’s. RJR’s CEO, F. Ross Johnson, thought that the bad publicity of the harmful effects of tobacco products was stifling the lucrative foods division of the company. Additionally, the movie “Barbarians at the gate” suggested that RJR was going to attempt to promote a new product line of smokeless cigarettes. Unfortunately, focus groups had determined that the new product would not be profitable. Moreover, RJR had spent over $350 million in research and development on the smokeless cigarette. RJR’s executive team was
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