One Player's Gain Is Another's Pain

  • Share
  • Read Later


In a buyout as gigantic as RJR Nabisco's, which could cost from $21 billion to $27 billion, even the smallest pieces of the action will translate into tidy fortunes. The deal may generate some hefty losses as well.


SHAREHOLDERS. $8 BILLION TO $14 BILLION IN PROFITS. Before Oct. 20, when the public first learned that the food-and-tobacco company was in play, RJR's 225 million shares traded at $56 each. RJR's new owners will pay from $94 to $118 a share to buy the conglomerate.

NEW OWNERS. $2 BILLION OR MORE. The new stakeholders, a group that may range in size from a small core of investors to a large number of employees, will have a slice of equity that could grow from $200 million to more than $2 billion if the restructured company is successful.

LBO INVESTORS. A 40% ANNUAL YIELD. Returns on leveraged-buyout funds managed by firms like Kohlberg Kravis Roberts have been astronomical, compared with other investments. Their performance has attracted money from sources including the Coca-Cola pension fund and the Hartford insurance company.

INVESTMENT BANKERS. $300 MILLION TO $350 MILLION. Firms such as Shearson Lehman Hutton and Drexel Burnham Lambert receive substantial fees for helping bidders put their proposals together and financing their deals. An individual partner might earn $1 million to $2 million.

COMMERCIAL BANKS. $170 MILLION OR MORE. Whatever cannot be financed through junk bonds must be borrowed from banks, which impose an up-front fee of 1.4% on such risky loans in addition to substantial interest charges.

LAWYERS. $100 MILLION TO $200 MILLION. A battery of merger-and-acquisition experts are paid for their advice on how contracts should be worded and whether the deals are legal.

JUNK-BOND HOLDERS. A 14.5% ANNUAL RETURN. These investors assume the greatest risk. If the newly acquired company goes bankrupt, they are the last to be repaid.


CORPORATE-BOND HOLDERS. (-$1 BILLION.) RJR's $5 billion in highly rated corporate bonds became far riskier as soon as management announced its plans to borrow $16 billion more for an LBO. Their market value dropped 20%.

U.S. TAXPAYERS. (-$2 BILLION TO -$5 BILLION.) At first the Government will reap a windfall as RJR shareholders pay capital-gains taxes on their stock- sale profits. However, the Government is likely to lose money in the long run because interest payments on corporate debt -- and an RJR buyout will create a whopping pile of it -- are tax deductible.