Nabisco deal a treat for companies, Icahn; Value investor nets $600 million profit with financial skill


There are two big winners in the two-part deal to sell off Nabisco: Philip Morris shareholders, who saw the price of their stock rise nearly $4 yesterday on the news that the maker of Marlboro, Jell-O and Miracle Whip would now own brands like Oreo and Wheat Thins; and Carl Icahn, the value investor whose betting against the market when he bought a stake in Nabisco Group Holdings earlier this year gave him a large psychic and financial victory.

"When we bought Nabisco three or four months ago, everybody said it was in big trouble because of the litigation," Icahn recalled in an interview from his home in East Hampton, N.Y., where he spent most of last week as the final installments in the closely watched takeover drama unfolded. "Nabisco was just amazingly undervalued."

His investment grew to $980 million by the time the deal was done, netting him and his investors about $600 million.

Nabisco Holdings, which sells nuts and condiments as well as cookies and crackers, will be sold to Philip Morris for $14.9 billion, or $55 a share. Once that deal is complete, R. J. Reynolds will buy Nabisco Group Holdings, whose only asset is 80.6 percent of Nabisco Holdings, for $30 a share, or about $9.8 billion. The holding company will retain $1.5 billion in cash, "until we decide what we want to do with it," a spokeswoman said.

At a news conference yesterday, Geoffrey C. Bible, the chairman and chief executive of Philip Morris, said he would not spin off all of Kraft, which will be a giant among food makers once the acquisition of Nabisco is complete. The company does plan to sell shares in 10 percent to 15 percent of Kraft early next year, which Bible said could generate $5 billion to $10 billion.

Shares in all four companies involved in the deal went up yesterday. "This transaction has unlocked some value that had been hidden by the taint of tobacco smoke," said John M. McMillin, a food stocks analyst for Prudential Securities.

There were reports yesterday that Group Danone, the French food maker, had submitted a last-minute bid that came close to Philip Morris' offer. But to break up the deal would cost Danone a fee that Philip Morris executives estimated at $450 million.

Apart from the fiscal windfall, the deal is a vindication for Icahn, who led a short-lived proxy battle last spring aimed at getting Steven F. Goldstone, the chairman of what was then known as RJR Nabisco, to spin off the majority stake in Nabisco Holdings.

At that point, Goldstone had already announced plans to spin off the domestic tobacco business and sell the international rights to brands like Winston and Camel. Icahn argued that the food holdings should be freed up instead, leaving the domestic tobacco company inside the holding company as a hedge against costs from lawsuits brought by cigarette smokers. In a roundabout way, the deal announced Sunday, in which R. J. Reynolds will pay $30 a share for Nabisco Group Holdings, achieves just that.

Far from breaking out the champagne, Icahn said he was more or less taking the sale of Nabisco in stride. "It's a great way to lose," he said. "I think Goldstone did a good job in getting a good price for Nabisco."

On Friday, he sent a letter to Goldstone, the chairman of Nabisco, offering to increase his bid to $31 a share in cash and short-term notes, which Icahn believes prompted R. J. Reynolds to improve its offer.

"I increased the bid, and while I didn't win, I'm sure it got the price higher for Nabisco Group Holdings," he said. "I'm sure glad I didn't go to Spain."

Instead of heading across the Atlantic, where he was supposed to attend a wedding, he stayed in the New York area as investment bankers and lawyers hammered out the details of the sale of Nabisco Group Holdings, which is contingent on the sale of Nabisco Holdings going through. Both sales are supposed to be completed by October; while pending tobacco litigation could stall the Nabisco Group Holdings deal, many analysts do not expect that to happen.

"R. J. Reynolds is a richer parent as a result of its deal, which should please plaintiffs," said Martin Feldman, a tobacco stocks analyst for Salomon Smith Barney.

John Coale, a Washington lawyer who represents some of the plaintiffs in smoking-related lawsuits, said the improved strength of the tobacco companies "just means the payments to the plaintiffs are more solid."

Copyright © 2020, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad