1. Use the APV valuation method to determine the value per share of RJR Nabisco under (i) The pre-bid operating plan
(ii) The management group operating strategy
(iii) KKR’s operating strategy
Assume that the number of outstanding shares is 229 million. I will collect valuation numbers in class so make sure you hold on to a copy of your memo.
2. What accounts for the difference of the three operating plans?
The three operating plans generally hold different point of view of the company’s current situation. At first, the management group’s strategy was to sell part of RJR Nabisco’s food since the business was undervalued by market. By modernizing 4 plants bakeries and closing five others, the management group believes the separating could help the market distinguish the tobacco business and food business and realize the true intrinsic value of each business. Contrary to the pre-offer plans, the management groups want further cut the food business and sell to private to eliminate the undervaluation and generate substantial gains. By doing so, the company can focus on its tobacco business. The management group believes this way could help market realize the company’s value more efficiently and maximize shareholders’ interests. However, KKR hold a complete different opinion. It wants use a leverage buyout of the Nabisco and maintains all of the tobacco business and food operations. KKR want to expand the tobacco to Winston-Salem, North Carolina. KKR believes continuing operating food business properly could bring more benefit than simply sell the assets of food business and recognize gain at one time. In sum, different operating plans are because of different perspective and operating style of investors.
3. How can a buyout like the KKR takeover of RJR Nabisco create value? Give a qualitative answer in bullet-points? How does replacing equity with debt, i.e. increasing the leverage ratio, create value for