NGH, article from London's the TIMES
<<THEY have a saying for it in New York - d‚j… vu all over again. Teams of investment bankers are buzzing once more around Nabisco, the US food company that was at the heart of the most notorious corporate power struggles of the 1980s, a saga immortalised in the bestselling book, Barbarians at the Gate.
For the past few weeks, Philip Morris, Danone and Cadbury Schweppes have all been jostling for position in the auction of Nabisco. Their aim is to pick up one or all of Nabisco's many brands, which range from Ritz crackers to Oreo cookies and LifeSavers confectionery. The businesses have a value of between $12 billion and $15 billion. Add Carl Icahn, the notorious coporate raider, and the mix is combustible enough to catch Wall Street's imagination for a second time.
Back in 1988, the company was known as RJR Nabisco, a tobacco and food empire formed by the merger of RJ Reynolds and Nabisco. RJ Reynolds was the maker of Camel and Winston cigarettes, set up in 1875. Nabisco - or National Biscuit Co - was formed in Chicago in 1898 and first became known for its cunningly named Uneeda biscuit brand. It steadily added other household names, including Oreo cookies, Shredded Wheat cereal and Ritz crackers.
In its late 1980s incarnation, RJR Nabisco was run by Ross Johnson, a free-spending Canadian who liked to hang out with American sports stars. Excess leaked from every pore of the company - from the fleet of 10 corporate jets known as the RJR Air Force to the country club memberships it bought for its executives and the flashy offices it inhabited.
Frustrated by its stagnant share price, Johnson and his fellow executives triggered a battle for RJR Nabisco by submitting a bid for the company with borrowed money. Their leveraged buyout would have been the biggest in history but a dizzying escalation in the bidding followed.
The frenzy was more of a reflection of the ambitions of various investment banks than the intrinsic value of the company. Victory finally went to Henry Kravis. His team at Kohlberg Kravis Roberts put together a $25 billion offer, trouncing Johnson and staggering the rest of Wall Street.
Kravis did not keep the debt-burdened company for long. RJR Nabisco was floated again in 1991 and KKR gradually withdrew. RJR Nabisco, which had sold off assets such as the Shredded Wheat business, spun off nearly 20 per cent of its food business as a separately traded stock in 1995.
Then it became even more complicated. Last May, in the wake of the tobacco industry's settlement with litigating US states, RJR Nabisco's international tobacco business was sold for about $8 billion.
Then the domestic tobacco business was spun off to shareholders, who were left with shares in Nabisco Group Holdings - a shell whose sole asset was its 80.5 per cent interest in the foods group - plus shares in the born-again RJ Reynolds cigarette business.
Confused? Most people are. The new structure did little for NGH's share price, which tumbled from more than $22 last June to less than $10 at the end of March, even though the Nabisco food businesses were starting to reap the benefits of a revamp of its sales force.
Carl Icahn, a disgruntled shareholder with a stake of about 10 per cent, saw a fresh opportunity to harry the board, having failed in a prior attempt with Bennet LeBow to get the management to spin off the food business instead of the tobacco arm. Icahn threatened to build a menacing 40 per cent stake in NGH by buying up extra shares at $13 each.
The Nabisco board turned him down but admitted it was up for sale in the process, saying it was exploring "all alternatives" - commonly understood to mean that an auction is under way.
Icahn came back with a bid for the whole company, offering to pay $16 a share, or about $5.2 billion.
Meanwhile, the heavy hitters of the food industry have been circling. Chief among the suitors is Philip Morris, which owns Marlboro cigarettes and Kraft foods. Kraft's brands include Maxwell House coffee, Philadelphia cream cheese and a host of others - but little in the way of biscuits.
James Kilts, the boss of Nabisco foods, used to head Kraft, leading to speculation that he might like to merge and then run the two companies. The massive cash flow thrown off by the cigarette business certainly gives Philip Morris firepower that will be hard to beat, although the idea of Nabisco recombining with a cigarette company might encounter opposition.
Cadbury Schweppes has admitted also that it is considering some Nabisco brands, thought to be the LifeSavers chewing gum and sweets businesses. It has no interest in buying the biscuits arm and has considered therefore a joint bid with Danone, the French foods group.
Danone would love to expand in North America and get its hands on Oreo cookies and Ritz biscuits. It is collaborating already with Nabisco and other partners on a bid for United Biscuits, the maker of McVities biscuits and KP snacks, in the UK.
RJ Reynolds, NGH's erstwhile tobacco arm, may also play a role in the eventual carve-up of its former parent. Nestl‚ could also play a bit part in the proceedings, emerging from the auction with one or more Nabisco brands. They could be a thorn in Cadbury's side, both looking to pick up the crumbs from the table.
The auction process is being handled by Morgan Stanley Dean Witter and Warburg Dillon Read and the first bids are understood to have been submitted. The strange structure of the Nabisco empire means that the current situation is murky, to say the least, with few people being sure who has bid for what.
It would seem logical for those wanting to take control of all the Nabisco food businesses to mount an offer for NGH, as it is the majority shareholder. Buying up the separately traded Nabisco Holdings food stock on its own would appear to be pointless because it would get you only about 20 per cent of the prize. The alternative is for a bidder somehow to buy the Nabisco food assets from NGH, which would then be left as a cash-rich shell, although this is a strategy fraught with complications.
One potentially explosive issue is Nabisco's previous exposure to tobacco litigation. Can a buyer of the food businesses really be sure that they are not going to be vulnerable to further litigation? A spokesman for NGH ducked the question. "I don't really have an answer to that," he said.
Tim Swanson, an analyst at AG Edwards, says the spin-off of RJ Reynolds was designed to relieve NGH of its tobacco liabilities but he says this may yet be put to the test.
An indemnity clause might not stop NGH being dragged into court over the issue: "The lawyers are going to go where the money is."
The sale process is likely to go on for weeks. The negotiations may not have produced anything to rival the 1988 frenzy yet, but these are early days and Unilever's bid for Bestfoods, the US maker of Hellmann's mayonnaise and Knorr soups, has sent a clear signal that the food industry is going through a bout of aggressive consolidation. As happened in the 1980s, the fear is that those who do not eat will be eaten themselves.>>
the-times.co.uk |
