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The market was also disturbed by reports that Federated Department Stores, which was acquired by Campeau Corp. earlier this year in a highly leveraged $6.6 billion deal, had withdrawn a $1.2 billion issue of junk bonds because there were not enough buyers. Federated's problems sent a message that financing for huge takeovers may be increasingly difficult to arrange.
Both KKR and Shearson are confident they can raise the money to buy RJR Nabisco, but it will not be easy. KKR has built up a $5.6 billion buyout fund with capital contributed by insurance companies, pension funds and other big investors. With that capital base, KKR has the ability to borrow as much as $56 billion, but how much it can raise for a single takeover remains to be seen. As in past deals, KKR will get part of the money by issuing high-yield junk bonds through Drexel Burnham Lambert. But that financing could be jeopardized if Drexel and its junk-bond wizard, Michael Milken, are indicted, as expected, for securities fraud. As insurance, KKR has also recruited Morgan Stanley and Merrill Lynch to help sell bonds.
In response, Shearson has called in yet another Wall Street firm, Salomon Brothers, to assist in attracting investors. Ultimately, Shearson can draw on the financial resources of its parent company, American Express (1987 revenues: $18 billion).
Neither KKR nor Shearson can finance the takeover of RJR Nabisco without some $12 billion in loans from commercial banks. Already the opposing bidders are lining up commitments from major banks in the U.S., Western Europe and Japan. Says a skeptical Wall Street investment banker: "The two sides are now competing to see how big a mountain of debt they can put on the head of a pin."
It was KKR that first brought leveraged buyouts into the headlines. Founded in Manhattan in 1976 by three men from the Bear, Stearns investment firm -- Jerome Kohlberg, 63, Henry Kravis, 44, and George Roberts, 45 -- the company started out modestly, with friendly deals in which it joined forces with management to take companies private. Among its first targets were U.S. Natural Resources (price: $22 million) and Pack River ($136 million).
But KKR's early success gave it a taste for bigger and bolder deals. By the mid-1980s, KKR started to make unsolicited takeover bids, though the company still does not like to go through with a buyout unless the target firm's board of directors eventually agrees to the deal. Kohlberg left KKR last year because he was concerned about the aggressive course his junior partners were taking.