The sad story of RJR Nabisco

It's over. A decade after RJR Nabisco was bought in the largest leveraged buyout in history, the company is being sliced into three pieces. It is a sad saga for almost all involved.

"The story is what happens when you really overpay for a company, and the debt levels are just too high," said Stephen F. Goldstone, who will be the last person to hold the job of chairman and chief executive of RJR Nabisco.

When all is finished, the only real winners will be those who cashed out in 1989 _ primarily the shareholders who sold and the investment bankers who arranged the buyout.

The losers include R.J. Reynolds and Nabisco, which almost certainly would have been more vigorous competitors had they not been saddled with more than $25-billion in debt from the buyout. Kohlberg Kravis Roberts, the leveraged-buyout firm that engineered the deal, lost more in reputation than it made in money.

Among the sufferers are investors who bought RJR Nabisco stock in 1991, when the company went public again, two years after Kohlberg Kravis took it private. A $100 investment then is now worth $51.

Kohlberg Kravis gave up in 1994, trading its RJR Nabisco stock for ownership of Borden Inc., the troubled food company. So far that looks like a doubtful investment at best.

What went wrong at RJR Nabisco? The tobacco business proved not to be as good a cash cow as the buyers thought it would be. The advantage of selling to addicted customers was reduced when price wars broke out among cigarette companies. Tobacco litigation proved to be a significant threat.

Those problems hurt RJR Nabisco more than its competitors. Philip Morris, the largest tobacco company and the owner of Kraft Foods, has seen its share price about double since 1991, while RJR Nabisco's price has been cut in half.

One difference was that Philip Morris had enough financial flexibility to invest in promoting its products, including Marlboro cigarettes and Maxwell House Coffee, while debt-ridden RJR Nabisco was forced to cut back on promotional spending for Winstons and Oreos. Over time, it hurt.

Now RJR Nabisco will sell its international tobacco business for $8-billion to Japan Tobacco. That money, after taxes, will go to pay debt. Then the domestic tobacco business will be spun off into a separate company, with just $1-billion of debt. Shareholders of the current RJR Nabisco will get the shares in that operation.

The remainder will be Nabisco, which will have two kinds of common stock. One type, the Nabisco Holdings shares that already trade, will have a stake in the profits from such products as Chips Ahoy and Ritz Crackers. The other will have a stake in the same profits.

But as the former parent of the tobacco company, it will also be burdened with the possibility of residual liability if lawsuits manage to bankrupt the tobacco company. The discount between those two prices will show just how scared investors are of tobacco litigation.

When all that is done, things will be almost back to where they were in 1985, before R.J. Reynolds acquired Nabisco. Nabisco will again be an independent company, albeit a weaker one than its predecessor. R.J. Reynolds will also be independent, with a smaller market share in this country and an international business that had to be sold to pay debt taken on in one of the most misguided deals in Wall Street history.

In a more just world, the investment banks that made hundreds of millions from the RJR Nabisco buyout might now join in the suffering. Instead, they will collect more fees for their services in dismembering the hobbled company.

Floyd Norris writes for the New York Times.

New York Times News Service