In August, 1989, The Wall Street Journal ran a story describing an R.J. Reynolds telephone operator as sobbing at the prospect of massive job cuts at the Winston-Salem-based tobacco company. “It’s the buy-out thing, you know. I’m real blue,” the woman was quoted as saying.
Just months earlier Kohlberg Kravis Roberts & Co. had acquired RJR Nabisco in the storied $25.1 billion buyout. The layoffs were among the first initiatives KKR undertook following the takeover.
The RJR Nabisco acquisition serves as the defining deal of the era. Barbarians at the Gate, a book chronicling the transaction, became a best seller, and was later adapted for a movie (with Jonathan Pryce playing Henry Kravis.)
For all the headlines, though, the investment turned out being among the biggest dogs in the KKR portfolio. The firm was widely criticized for what were termed slash-and-burn strategies and the amount of leverage that was used became an albatross around the company’s neck. RJR’s biggest rival Philip Morris capitalized on the company’s tenuous balance sheet by slashing prices, sending RJR’s profits tumbling.
KKR eventually used the bulk of its RJR stock to acquire Borden Inc. in 1994, and its final exit came just two years ago, when the firm sold Borden to Apollo Management.
A definitive account as to KKR’s ultimate loss on RJR is difficult to find. The Deal has reported that the firm lost around $730 million on the transaction (including the Borden investment). Meanwhile, The 1987 KKR Fund—the vehicle used for the RJR purchase—is posting an internal rate of return of 4.16%, according to CalSTRS, an investor in the fund. Reportedly around half of the vehicle was used in the investment.
RJR has proven to be nothing more than a setback for KKR, though. The firm, 17 years later, is among those enjoying the industry’s renaissance. It is reportedly seeking to raise a $15.5 billion fund; it has listed a public vehicle in Europe; and just last month, it was part of a consortium that agreed to pay $33 billion to acquire HCA—a deal that if it closes will replace RJR as the largest LBO of all time.