《金融工程》案例10-RJR
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The day before the first announcement of a possible takeover for RJR Nabisco, its stock had traded at $77.25.
Thus, KKR offered common shareholders a 41% premium over the firm’s pre-takeover value.
Background 2
In the late 1980s the food products industry experienced massive consolidation through mergers.
In 1988 two main bidders proposed to take the RJR Nabisco private in a leveraged buyout contest:
Financial Engineering
Cases in Financial Engineering
Instructor: Chen Miaoxin
Financial Engineering
The Case of RJR
Nabisco Holding Capital Corporation
2
Financial Engineering
Difference
The major difference among the three securities is the form in which interest is paid.
13
Financial Engineering
The difference 1
The 13.5-percent cash-paying bond pays interest in cash.
– $1.0 billion of 15-percent payment-in-kind subordinated debentures due 2001 (pay-in-kind bond)
– $4.1 billion of subordinated discount debentures due 2001 (deferred-coupon bond)
8
Financial Engineering
Part Two: Description of Securities
Financial Engineering
Issuance
In May 1989, RJR holdings Capital Corporation issued three nearly identical debt securities in connection with the leveraged buyout of RJR Nabisco by KKR
– $525 million of 13.5-percent subordinated debentures due 2001 (cash-paying bond)
10
Financial Engineering
11
Financial Engineering
12
Financial Engineering
To finance the buyout, KKR increased RJR’s debt from $5 billion to $29 billion.
7
Financial Engineering
Baidu Nhomakorabea
Background 4
The new firm was structured as a series of holding companies.
Through acquisitions in the 1960s, the tobacco firm entered a variety of food businesses.
After its 1985 merger, the firm was renamed RJR Nabisco.
5
Financial Engineering
Reference:
Robert M. Dammon, Kenneth B. Dunn. And Chester S. Pratt. 1993. The Relative Pricing of High-Yield Debt: The Case of RJR Nabisco Holdings Capital Corporation. the American Economic Review, 83 ( Dec.)
Financial Engineering
Part One: Background
Financial Engineering
Background 1
The firm known in 1991 as RJR Nabisco was a descendant of the tobacco firm R.J. Reynolds, founded in 1875.
Each of these related entities had separate obligations, issued either in conjunction with the acquisition or, in the case of RJR Nabisco, Inc, the operating company, carried over from the taken-over firm.
– The Management Group
– Kohlberg, Kravis, Roberts &Co. (KKR), a firm specializing in leveraged buyouts
6
Financial Engineering
Background 3
At the end of a bidding war, KKR prevailed by offering shareholders $81 per share in cash plus a package of bonds valued at $28.
Thus, KKR offered common shareholders a 41% premium over the firm’s pre-takeover value.
Background 2
In the late 1980s the food products industry experienced massive consolidation through mergers.
In 1988 two main bidders proposed to take the RJR Nabisco private in a leveraged buyout contest:
Financial Engineering
Cases in Financial Engineering
Instructor: Chen Miaoxin
Financial Engineering
The Case of RJR
Nabisco Holding Capital Corporation
2
Financial Engineering
Difference
The major difference among the three securities is the form in which interest is paid.
13
Financial Engineering
The difference 1
The 13.5-percent cash-paying bond pays interest in cash.
– $1.0 billion of 15-percent payment-in-kind subordinated debentures due 2001 (pay-in-kind bond)
– $4.1 billion of subordinated discount debentures due 2001 (deferred-coupon bond)
8
Financial Engineering
Part Two: Description of Securities
Financial Engineering
Issuance
In May 1989, RJR holdings Capital Corporation issued three nearly identical debt securities in connection with the leveraged buyout of RJR Nabisco by KKR
– $525 million of 13.5-percent subordinated debentures due 2001 (cash-paying bond)
10
Financial Engineering
11
Financial Engineering
12
Financial Engineering
To finance the buyout, KKR increased RJR’s debt from $5 billion to $29 billion.
7
Financial Engineering
Baidu Nhomakorabea
Background 4
The new firm was structured as a series of holding companies.
Through acquisitions in the 1960s, the tobacco firm entered a variety of food businesses.
After its 1985 merger, the firm was renamed RJR Nabisco.
5
Financial Engineering
Reference:
Robert M. Dammon, Kenneth B. Dunn. And Chester S. Pratt. 1993. The Relative Pricing of High-Yield Debt: The Case of RJR Nabisco Holdings Capital Corporation. the American Economic Review, 83 ( Dec.)
Financial Engineering
Part One: Background
Financial Engineering
Background 1
The firm known in 1991 as RJR Nabisco was a descendant of the tobacco firm R.J. Reynolds, founded in 1875.
Each of these related entities had separate obligations, issued either in conjunction with the acquisition or, in the case of RJR Nabisco, Inc, the operating company, carried over from the taken-over firm.
– The Management Group
– Kohlberg, Kravis, Roberts &Co. (KKR), a firm specializing in leveraged buyouts
6
Financial Engineering
Background 3
At the end of a bidding war, KKR prevailed by offering shareholders $81 per share in cash plus a package of bonds valued at $28.