1989
1990
1991
1992
1993
Prebid Strategy
Management Strategy
KKR Strategy
145.79
738.74
728.69
153.99
357.99
619.41
175.16
340.27
528.39
183.36
313.01
499.55
182.57
274.38
349.53
PV
Prebid Strategy
Management Strategy
KKR Strategy
145.79
738.74
728.69
134.78
313.33
542.14
134.18
260.66
404.78
122.94
209.87
334.95
107.14
161.02
205.12
Asset Sales
1989
Prebid Strategy
Management Strategy
KKR Strategy
1990
0
12680
3500
1991
0
0
2700
1992
0
0
0
1993
0
0
0
0
0
0
PV
Prebid Strategy
0
Management Strategy
12680
KKR Strategy 5863.171731
Capex
1989
Prebid Strategy
Management Strategy
KKR Strategy
Terminal Value
PV
Prebid Strategy
Management Strategy
KKR Strategy
Operating improvements
1990
1991
1992
1993
1,708
432
774
1,462
381
556
1,345
380
555
930
389
572
738
396
586
1708
432
774
1279.61
333.47
486.64
1030.35
291.10
425.16
623.56
260.82
383.52
433.09
232.39
343.89
1989
1990
1991
1992
1993
Prebid Strategy
Management Strategy
KKR Strategy
2898
1917
2862
3336
2385
3228
3838
2814
3811
4216
3266
4140
4634
3589
4508
PV
Prebid Strategy
Management Strategy
KKR Strategy
2898
1917
2862
2919.83
2087.47
2825.30
2940.14
2155.69
2919.46
2826.80
2189.83
2775.84
2719.46
2106.20
2645.51
Column1
Prebid Strategy
Tax Shield
910.62
Asset Sales
0.00
Capex
8100.84
Operating Inc
46902.38
Management Strategy
KKR Strategy
Average
1909.93
2512.03
1777.53
12680.00
5863.17
6181.06
3525.80
5541.58
5722.74
35760.13
44541.65
42401.39
% Value
Prebid Strategy
Management Strategy
KKR Strategy
Tax Shield
51%
107%
141%
Asset Sales
0%
205%
95%
Capex
142%
62%
97%
Operating Inc
111%
84%
105%
250%
200%
Sources of Value:
150%
100%
50%
0%
Prebid Strategy
Management Strategy
KKR Strategy
Management Strategy
1994
1995
1996
1997
1998
174.10
224.90
287.88
157.17
165.11
213.26
121.18
92.87
128.86
108.48
0.00
5.56
68.53
0.00
0.00
Terminal Value
627.25
0.00
0.00
89.43
115.52
147.86
70.66
74.23
95.87
47.68
36.54
50.70
37.36
0.00
1.91
20.66
0.00
0.00
Sum of PV
910.62
1909.93
2512.03
1994
1995
0
0
0
1994
1996
0
0
0
1995
1997
0
0
0
1996
1998
0
0
0
1997
0
0
0
1998
735
402
598
735
412
618
735
422
638
735
432
658
735
442
678
377.52
206.48
307.16
330.43
185.22
277.83
289.21
166.05
251.04
253.13
148.78
226.61
1775.93
1269.48
2065.73
1994
1995
5093
3945
4906
2615.96
2026.30
2519.91
50000.00
45000.00
40000.00
35000.00
30000.00
25000.00
20000.00
15000.00
10000.00
5000.00
0.00
5596
4337
5341
2515.75
1949.75
2401.11
1996
6149
4768
5815
2419.50
1876.10
2288.08
1997
6756
5243
6335
2326.71
1805.64
2181.72
Sum of PV
8100.84
3525.80
5541.58
1998
7424
5766
6902
Terminal Value
67951.34
52775.79
63173.51
22720.24
17646.14
21122.73
Sum of PV
46902.38
35760.13
44541.65
Tax Shield
Asset Sales
50000.00
45000.00
40000.00
35000.00
30000.00
25000.00
20000.00
15000.00
10000.00
5000.00
0.00
Tax Shield
Asset Sales
Capex
Operating Inc
ources of Value:
Pre-bid Operating Income fueled by Capital expenditure
Management Strategy More distributed. They will sell assets, as well as earn on Tax Shields
KKR Tax Shields, Assets as well as operating efficiecies
3%
3%
Interest
Prebid Strategy
Management Strategy
KKR Strategy
1989
551
2,792
2,754
1990
582
1,353
2,341
1991
662
1,286
1,997
1992
693
1,183
1,888
1993
690
1,037
1,321
1994
658
850
1,088
1995
594
624
806
1996
458
351
487
1997
410
0
21
1998
259
0
0
1995
1996
1997
1998
157.1683 121.1836 108.4832 68.52961
165.1061 92.87217
0
0
213.262 128.8568 5.556455
0
Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in millions of
dollars, except per share data).
1982
1983
1984
1985
1986
Operations:
Revenues
$7,323
$7,565
$8,200
$11,622 $15,102
Operating income
1,142
1,205
1,412
1,949
2,340
Interest and debt expense
180
177
166
337
565
Income before provision for income taxes
1,012
1,110
1,353
1,663
1,782
Income from continuing operations
548
626
747
917
1,025
Income from discontinued operationsa
322
255
463
84
39
Net income
870
881
1,210
1,001
1,064
Tax
142
229
143
662
718
Tax rate
14.0%
20.6%
10.6%
39.8%
40.3%
Source: Casewriter.
a
Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.
26.5%
Column1
1986
Beta Equity
1.24
Debt
5547
Equity
13991.1
Value
19538.1
Asset Beta 0.887955533
Average Beta 0.694803178
MRP
Risk free rate
9%
8%
1987
0.67
4219
12571.875
16790.875
0.5016508222
Assumption
Assumption
Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in
millions of dollars, except per share data).
1982
Operations:
Revenues
Operating income
Interest and debt expense
Income before provision for income taxes
Income from continuing operations
Income from discontinued operationsa
Net income
Stockholder Information:
Earnings per share
Dividends per share
Closing stock price at year end
Price/earnings at year end
Numbers of shares at year end (millions)b
Betac
1983
1984
1985
1986
1987
$7,323
1,142
180
1,012
548
322
870
$7,565
1,205
177
1,110
626
255
881
$8,200
1,412
166
1,353
747
463
1,210
$11,622
1,949
337
1,663
917
84
1,001
$15,102
2,340
565
1,782
1,025
39
1,064
$15,766
2,304
489
1,816
1,081
128
1,209
$3.13
1.14
20.40
6.5x
281.5
0.80
$2.90
1.22
24.30
8.38x
283.2
0.70
$4.11
1.30
28.80
7.01x
258.4
0.74
$3.60
1.41
31.38
8.72x
250.6
1.21
$3.83
1.51
49.25
12.86x
250.4
1.24
$4.70
1.76
45.00
9.57x
247.4
0.67
Divestitures and acquisitions for the years 1982 to 1987 are as follows:
Calculated using daily stock price data for each year by ordinary least-squares regression.
Exhibit 3
Consolidated Balance Sheets for RJR Nabisco, 1986-1987 (in millions of dollars).
1986
Assets:
Cash
Net receivables
Inventories
Other current assets
Property, plant and equipment, net
Goodwill and other intangibles
Net assets of discontinued operations
Other assets
Total assets
Liabilities:
Notes payable
Accounts payable
Current portion of long-term debt
Income taxes payable
Long-term debt
Deferred income taxes
Redeemable preferred stock
Other noncurrent liabilities
Total liabilities
Stockholders equity
Total liabilities and stockholders equity
1987
$827
1,675
2,620
273
5,343
4,603
716
644
$16,701
$1,088
1,745
2,678
329
5,847
4,525
-649
$16,861
$518
2,923
423
202
4,833
751
291
1,448
$11,389
5,312
$16,701
$442
3,187
162
332
3,884
846
173
1,797
$10,823
6,038
$16,861
4,219
Exhibit 4
Financial Summary of RJR Nabisco by Business Segment, 1982-1987 (in millions of dollars).
1982
1983
1984
1985
1986
Tobacco:
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense
$4,822
1,187
3,219
81
238
36.9%
--
$4,807
1,150
3,378
78
383
34.0%
--
$5,178
1,305
3,812
107
527
34.2%
--
$5,422
1,483
4,496
146
647
33.0%
--
$5,866
1,659
4,882
205
613
34.0%
--
$6,346
1,821
5,208
244
433
35.0%
(261)
Food Products:
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense
$2,501
21
1,710
51
84
1.2%
--
$2,758
129
1,761
56
94
7.3%
--
$3,022
181
2,211
68
86
8.2%
--
$6,200
549
9,598
195
279
6.0%
--
$9,236
820
9,822
376
344
8.0%
--
$9,420
915
10,117
380
445
9.0%
$392
53
1,084
14
11
4.9%
--
$746
$703
$766
$876
113
122
131
138
740
815
895
991
24
22
24
30
13
13
26
25
15.3%
15.0%
14.6%
14.0%
-----
$-(66)
3,106
11
16
-2.1%
--
$-(74)
3,197
16
15
-2.3%
--
$-(74)
2,257
16
29
-3.3%
--
$-(83)
1,684
13
20
-5.0%
--
Includes earnings on cash and short-term investments and miscellaneous discontinued operations.
$-(139)
1,319
24
65
-10.5%
--
1987
18
$--------
$-(182)
1,536
28
58
-11.9%
(7)
Exhibit 5
Cash Flow Projections for RJR Nabisco Under Its Prebid Strategy, 1988-1998 (in millions of dollars).
Tobacco sales
Food sales
Total
Operating income
Tobacco
Food
Corporate
Total
Interest
Net income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Cash flow available for capital paymentsa
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
7,061
9,889
16,950
7,650
10,438
18,088
8,293
11,383
19,676
8,983
12,092
21,075
9,731
12,847
22,578
10,540
13,651
24,191
11,418
14,507
25,925
12,368
15,420
27,788
13,397
16,393
29,790
14,514
17,428
31,942
15,723
18,533
34,256
1,924
1,079
-350
2,653
551
1,360
730
1,142
2,022
1,163
-287
2,898
582
1,498
807
1,708
80
517
2,360
1,255
-279
3,336
662
1,730
791
1,462
111
948
2,786
1,348
-296
3,838
693
2,023
819
1,345
98
1,399
3,071
1,459
-314
4,216
690
2,259
849
930
105
2,073
3,386
1,581
-333
4,634
658
2,536
866
738
113
2,551
3,733
1,713
-353
5,093
594
2,858
867
735
121
2,869
4,115
1,855
-374
5,596
458
3,251
867
735
130
3,253
4,534
2,011
-396
6,149
410
3,625
867
735
140
3,617
4,998
2,178
-420
6,756
259
4,094
867
735
151
4,075
5,508
2,361
-445
7,424
-21
4,625
861
735
162
4,589
Source: Casewriter.
a
Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.
Exhibit 6
dollars).
Cash Flow and Capital Structure Projections for RJR Nabisco Under the Management Group Strategy, 1989-1998 (in millions of
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
7,650
1,917
2,792
388
-965
777
432
41
12,680
12,018
8,293
2,385
1,353
388
293
725
381
45
0
593
8,983
2,814
1,286
388
621
726
380
48
0
919
9,731
3,266
1,183
388
987
735
389
52
0
1,282
10,540
3,589
1,037
388
1,297
749
396
57
0
1,594
11,418
3,945
850
388
1,655
754
402
61
0
1,946
12,368
4,337
624
388
2,063
758
412
67
0
2,344
13,397
4,768
351
388
2,527
763
422
72
0
2,797
14,514
5,243
0
388
3,073
769
432
78
0
3,332
15,723
5,766
0
388
3,418
774
442
85
0
3,666
310
11,708
0
0
0
12,018
375
218
0
0
0
593
721
198
0
0
0
919
816
466
0
0
0
1,282
400
1,194
0
0
0
1,594
728
1,217
0
0
0
1,946
1,854
0
490
0
0
2,344
0
0
2,510
287
0
2,797
0
0
0
3,332
0
3,332
0
0
0
3,327
339
3,666
4,894
3,292
3,000
11,186
1,632
1,035
1,535
4,202
4,519
3,075
3,000
10,594
1,938
1,229
1,828
4,995
3,798
2,877
3,000
9,675
2,303
1,460
2,449
6,212
2,982
2,411
3,000
8,393
2,736
1,735
3,436
7,907
2,582
1,217
3,000
6,799
3,250
2,061
4,733
10,044
1,854
0
3,000
4,854
3,861
2,448
6,388
12,697
0
0
2,510
2,510
4,587
2,909
8,451
15,947
0
0
0
0
5,162
3,455
10,978
19,595
0
0
0
0
2,801
4,105
14,051
20,957
0
0
0
0
0
4,538
17,469
22,007
The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The
difference between the purchase price and book value is amortized over 40 years using the straight-line method.
a
Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds from asset
sales.
b
Exhibit 7
Cash Flow and Capital Structure Projections for RJR Nabisco Under KKR's Strategy, 1989-1998 (in millions of dollars).
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
###
###
###
###
###
###
###
###
###
###
###
###
4,998
1,561
-224
6,335
5,508
1,630
-235
6,902
7,650
8,540
###
8,293
6,930
###
8,983
7,485
###
9,731
8,084
###
###
8,730
###
###
9,428
###
2,022
1,060
-219
2,862
2,754
388
-281
1,159
774
79
206
3,500
3,732
2,360
1,026
-158
3,228
2,341
388
233
991
556
84
237
2,700
3,521
2,786
1,191
-167
3,811
1,997
388
845
899
555
87
312
0
1,414
3,071
1,245
-176
4,140
1,888
388
1,134
907
572
94
366
0
1,740
3,386
1,307
-185
4,508
1,321
388
1,751
920
586
102
0
0
1,983
3,733
1,367
-194
4,906
1,088
388
2,168
924
598
110
0
0
2,383
310
3,422
0
0
3,732
375
3,146
0
0
3,521
721
816
400
400
2,182
0
0
0
693
924
1,583
1,983
629
0
0
0
0
0
0
0
21
3,330
149
0
0
0
0
0
0
0
3,806
4,319
1,414
1,740
1,983
2,383
2,832
3,330
3,956
4,319
4,894
8,958
3,500
1,580
###
2,896
1,219
4,519
5,812
3,500
1,817
###
3,331
1,452
3,798
5,119
3,500
2,129
###
3,958
2,297
2,982
4,195
3,500
2,495
###
4,702
3,430
2,582
2,612
3,500
4,115
1,430
-203
5,341
806
388
2,641
928
618
119
0
0
2,832
4,534
1,494
-213
5,815
487
388
3,164
933
638
129
0
0
3,330
21
0
388
388
3,814
4,203
939
945
658
678
140
151
0
0
0
0
3,956
4,319
2,182
0
0
629
0
0
3,500
3,470
149
0
0
0
0
8,694
6,311
3,470
149
5,586
6,636
7,883
9,365
7,320
7,676
9,844
###
###
###
0
0
0
0
0
0
0
0
0
0
4,377
###
Total
4,115
4,783
6,255
8,132
###
###
###
###
###
###
Source: Casewriter.
The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The
difference between the purchase price and the book value is amortized over 40 years using the straight-line method.
a
Cash flow available for capital payment = net income + noncash interest + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds
from asset sales.
b