RJR to split tobacco units; Company would sell its international arm, spin off U.S. division; Japanese offer $8 billion; Moves could increase value, protect assets amid tobacco lawsuits

THE BALTIMORE SUN

Moving to raise its value as it faces billions of dollars in legal claims, RJR Nabisco Holding Corp. said yesterday that it will sell its international tobacco business to Japan Tobacco Inc. for $8 billion and spin off its domestic tobacco business.

Together, the moves would mark the dismantling of a company, acquired a decade ago in a $25 billion leveraged buyout, that makes Oreo cookies, Planters peanuts and Ritz crackers along with Winston, Camel and Salem cigarettes.

Stephen F. Goldstone, the chairman and chief executive officer of RJR Nabisco, linked the moves, calling the sale of Reynolds International a "paramount strategic objective."

"It enables us to realize extraordinary value from that business, and paves the way for us to separate the domestic tobacco business from the rest of our organization on a sound and prudent financial basis," he said.

In the face of more than 800 lawsuits seeking hundreds of billions of dollars in damages from the tobacco industry, RJR shares have lost more than half their value since the company went public in 1991. Shareholders, including former corporate raider Carl Icahn, have pressured RJR for about four years to split the tobacco and food businesses.

RJR shares rose 12.5 cents to close at $28.75. Nabisco rose 31.25 cents to $45.062.

"We're going to take this tobacco business, which has been crippled by LBO [leveraged buyout] debt for the past 10 years, and fix our balance sheet," Goldstone said. "Then we're going to let investors decide whether they want to invest in tobacco or Nabisco."

John C. Maxwell, a tobacco industry analyst for Davenport & Co., said RJR beat a March 12 deadline for selling its international business.

"They need the money, and they got an awfully good price," he said. "They were expected to get $6 billion or $6.5 billion."

Under terms of the sale, Tokyo-based Japan Tobacco would pay $7.8 billion and assume $200 million in debt. Japan's sole tobacco manufacturer, which is two-thirds owned by the Japanese government, would get the business and trademarks of RJR International, including the international rights to Camel, Winston and Salem. The deal would be completed within two months.

The sale is subject to regulatory conditions and receipt of consents from RJR Nabisco's bondholders.

The sale ends RJR's attempt to tap emerging overseas markets, which provide about 60 percent of its international sales. The company's share in the world market has remained flat over the past decade, at about 6 percent, while British American Tobacco Plc and Philip Morris have seen their market shares grow. International tobacco, which accounts for about 20 percent of RJR's profit, had about $3 billion in revenue in 1998.

RJR Nabisco plans to use proceeds from the international sale to cut its debt -- to about $1 billion -- and strengthen the position of Reynolds Tobacco Co., Maxwell said.

The RJR plans to separate the tobacco and food businesses call for a tax-free spinoff to holders of shares in the domestic tobacco business. After the spinoff, RJR Nabisco would continue to exist as a holding company, renamed Nabisco Group Holdings, which would own 80.6 percent of Nabisco Holding Corp., the food company. Both would be traded on the New York Stock Exchange.

2; "They need the money, and they got an awfully good price." John C. Maxwell,tobacco industry analyst

RJR Nabisco said it will announce specifics of the separation transaction, which is subject to final board approval, upon completion of the sale of the international tobacco business.

Reynolds Tobacco, which had $5.6 billion in revenue last year and is the nation's No. 2 cigarette maker behind Philip Morris Cos., would be based in Winston-Salem, N.C., and would also be traded on the New York Stock Exchange.

RJR Nabisco headquarters and most of its corporate staff -- about 100 jobs -- would be eliminated.

"We believe that the food and tobacco businesses will be best able to achieve their full potential under separate ownership structures," Goldstone said. "Each is a large, complex business with very different challenges, strategies and means of doing business."

Icahn, who favors a spinoff of the food business, holds 7.7 percent of RJR shares. He has lost two proxy fights and has until Friday to propose his own slate of directors, a scenario that sources said appears unlikely.

Richard A. Daynard, a Boston law professor who heads the Tobacco Products Liability Project, applauded the tobacco spinoff as an ethical alternative to a spinoff of the food business, which would have made its assets unavailable to plaintiffs seeking damages.

"It looks to me like it's actually an honest corporate reorganization without any attempt to shake off the tort creditors," he said.

Under the food spinoff scenario, a plaintiff would be left empty-handed if the tobacco company went bankrupt. With a tobacco spinoff, that's not the case, Daynard said.

"The food assets are still under a cloud," Daynard said. "I think what this does is give investors three clear choices" -- the tobacco company, the food company or Nabisco Group Holdings, which will hold more than 80 percent of the food company but carry liability for tobacco damages.

Timothy Ghriskey, senior portfolio manager at Dreyfus Corp., which owned 1.1 million RJR shares in December, said: "They're trying to indemnify their assets from the taint of tobacco litigation, but they're really pushing the envelope in terms of its ability to stand up legally."

The announcement will divide two century-old companies that combined in 1985 when RJR paid $4.9 billion for Nabisco brands. Nabisco Chief Executive Ross Johnson, who became president and then CEO of the combined company, attempted to take RJR private in a leveraged buyout chronicled in the book "Barbarians at the Gate."

Buyout specialists Kohlberg Kravis Roberts & Co. prevailed in 1989 with a $26.4 billion bid -- at the time, the largest leveraged buyout in U.S. history. RJR went public at $56 a share adjusted for splits in 1991 and sold its initial Nabisco stake at $24.50 a share in January 1995.

Because of litigation, RJR and Philip Morris Cos., trade at about 13 times estimated earnings -- a discount especially in a booming market. Standard & Poor's food industry index carries a multiple of about 23 times earnings.

"If you're looking at the food assets of Nabisco, where should they be valued as a separate entity?" asked Michael Schroeder, chief investment officer of Wasmer, Schroeder & Co., which owns Nabisco bonds. "I guess we're going to find out."

Bloomberg News contributed to this article.

Pub Date: 3/10/99

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