The RJR Nabisco Deal: Inside History’s Biggest Leveraged Buyout
Greed, Glamour, and the Making of an ’80s Wall Street Legend.
Skin in the Game
It’s early 1988 in Midtown Manhattan. Cherry trees are starting to blossom in Central Park, not far from where Ross Johnson, CEO of RJR Nabisco, is having a working lunch with investment banker Peter Cohen to discuss changes at the company. Over lunch, Ross floats an idea: he wants more than to run the firm. He wants “skin in the game” — his own stake tied to RJR Nabisco’s performance. Ross needs Peter’s advice — Peter represents Shearson Lehman Hutton, a powerful investment bank. It could structure the deal, line up lenders and financiers, and assemble the legal team to close what would become the largest leveraged buyout in history.
The Lunch That Changed Wall Street
At lunch, in 21 Club, Ross’s favourite locale, they strategise the move to the Board of the company. RJR Nabisco is a cigarette and food manufacturing conglomerate. RJR Nabisco’s share price stood at $56. With roughly 230 million shares outstanding, the firm was valued at $13 billion. So together, they agree on a strategy: pitch the board on a ‘conglomerate discount.’ Ross would use his charm to tell the Board how he’d be offering a 33% premium to the existing shareholders, $75/share or a $17B valuation, and let some join him in the new SPV, formed to take over 100% of RJR Nabisco in a leveraged buyout.
Finding a Buyer
A few months later, Ross presented the offer to the board. As in the LBOs, the board has a fiduciary duty to achieve the highest price for the shareholders. So Charles Hugel, the board member chairing the special committee, led the search for other bidders. He hired an investment bank to prepare the investment memorandum and send it to potential investors. After Lazard, RJR Nabisco’s investment bank, made initial contact, potential bidders submitted non-binding offers, known as letters of intent, or LOIs. Bankers then reviewed these and selected investors for a second stage. Bankers weigh offer size, reputation, experience, and the ability to actually finance the deal.
The Bidding War
Enter KKR, the formidable private equity firm founded by Henry Kravis, Jerome Kohlberg, and George Roberts, Wall Street’s powerhouse. They had the money, reputation, and network to outbid the $17 billion assembled by the CEO and his backers.
By October 1988, however, three bidders were vying to own RJR Nabisco. The third one was Forstmann Little, another investment firm. The board was in a strong position. Its floor offer already valued the firm a third higher than months earlier, and now two rival bidders were pushing the price up further in a “bidding war.”
The Board’s Decision
After several rounds of bidding, KKR submitted a modified, binding offer of $109 per share — around $25 billion — for RJR Nabisco on a cash- and debt-free basis. Ross and his backers had placed a higher offer, at $112 per share (roughly $26 billion). But the board judged KKR more likely to follow through on financing the deal, and more likely to succeed with a restructuring that created value for stakeholders. By Christmas 1988, KKR had won — a Barbarian at the Gate that conquered the empire. Like Rome 1,500 years earlier, that empire would soon be divided into pieces.
The Aftermath
At last, KKR was only able to recover the costs of its stake in RJR Nabisco, perhaps with a small IRR. Even KKR’s own press release on the deal’s 20th anniversary noted that the fund would have earned twice the IRR had it never invested in the conglomerate.
Even today, RJR Nabisco’s pieces belong to other companies. The tobacco business — including Camel and Winston — was absorbed by Reynolds American; the food unit, including Oreo and Ritz, is now owned by Mondelez International. The real reason this deal still fills headlines and books isn’t KKR’s returns — it’s that the deal captures 1980s Wall Street itself: an era of ever-larger bets, later immortalized on film, from Michael Douglas’s Gordon Gekko in 1987’s Wall Street to Leonardo DiCaprio’s Jordan Belfort in 2013’s The Wolf of Wall Street.
Written by George Chanturia, Founding Partner at Argo Advisory