A Look Back At The Largest LBO Ever –

For good or for ill – and a final call on that depends on who you ask – leveraged buyouts jumped to the forefront of the financial world in 1988, when Kohlberg Kravis Roberts & Co. began its now legendary quest to buy tobacco and food powerhouse RJR Nabisco. Immortalized in print in the book Barbarians at The Gate, and in a subsequent made for television movie, the $25 billion deal still stands, by far, as the largest LBO ever completed and a seminal event for the buyouts industry as a whole. Meanwhile, for some in the general public, the buyout, which had a total value of $31.4 billion (the $25 billion cash price plus debt assumed by KKR), is remembered as one of the defining symbols of the 1980s era of corporate greed.

“Just the pure size of the transaction as well as the fact that this deal sort of ended up being the last hurrah of Drexel Burnham Lambert – whose power to raise money meant no company was immune from a takeover – these two elements kind of crystallized and made the deal something everyone was watching,” says a source close to the deal.

The battle for RJR began in late October 1988 when F. Ross Johnson, president and chief executive officer at RJR Nabisco, launched a management-led LBO bid for the company at $75 a share for a total value of $17 billion. Word that one of the country’s biggest brand-name companies was in play at a price that seemed cheap to some sparked interest in financial circles, and KKR launched a competing bid for RJR on Oct. 24, offering $90 a share. Just over a month of jockeying, deal structuring and back-and-forth bidding later, KKR won the auction for the company with a $109 per share offer for some $25 billion in total value. Kravis and Roberts became famous, while Johnson became the physical embodiment of greed (his picture running on a Dec.1988, cover of TIME Magazine next to the headline “A Game of Greed”).

KKR invested a staggering $3.2 billion of total equity into RJR Nabisco, expecting the deal to be worth the time and effort put into the transaction. Unfortunately for KKR, the RJR Nabisco deal did not perform up to expectations. “At the time of the deal, no one anticipated, which meant no one was ready to factor into their financial models, the anti-smoking sentiment that gripped the country after 1989 and the litigation hits tobacco companies took,” the source says. “If you just looked at the normal price increases that one would have expected to occur, the thing was a grand slam.”

In 1995, KKR launched an initial public offering of 19% of its Nabisco business, which netted approximately $1.2 billion. Late that year, KKR acquired Borden Inc. through a $2 billion stock swap using RJR Nabisco shares. KKR also sold the rest of its remaining 8% stake of RJR shares in early 1995 for a price reported to be about $5.73 a share, which was only ever so slightly more than the $5.63 per share on an adjusted cost basis that KKR paid to acquire RJR.

The fizzling of what was supposed to be a signature deal both for the industry and for KKR does not seem to have had staggering negative after-effects, beyond affecting the firm’s overall rate of return. “In terms of how it affected the firm, they had a lot of money tied up in the transaction that hasn’t gotten them any great returns, so that’s not good,” says a GP that was close to the deal. “But the company did well, it divided up, paid off its debt, created value.”

“KKR made a huge bet which, ultimately didn’t pay off,” says the original source. “But the fact that they still have the faith of their key investors shows how strong their other deals have performed.” There is plenty of evidence to support this view, including the fact that KKR’s Millennium Fund has raised more than $5 billion over the last two years.

Although it has become a cliche to note that records are made to be broken, most agree it is unlikely the industry will ever see a deal as large as the RJR Nabisco buyout.

“Could you raise $30 billion to purchase a company now?” asks the GP source. “The high yield market is not as effervescent as it was. The bank debt market isn’t as effervescent. So you’d need more equity today….Considering you could even do it, you’d have to put in the neighborhood of $10 billion in equity. I’m not sure there’s that much out there in terms of value.”

The size of the possible $8 billion buyout of Qwest Communications International Inc.’s yellow pages division – the biggest potential deal the buyout market has seen in some time – pales in comparison to the RJR Nabisco deal. KKR also claims the second largest LBO of all-time with the $8.7 billion purchase of Beatrice in 1986.

Contact Alistair Christopher at: