NEW YORK -- Kohlberg Kravis Roberts & Co. said Friday it plans to use only $2 billion from its own coffers to finance its record $24.8 billion leveraged buyout of food and tobacco giant RJR Nabisco Inc.
In the $109-a-share deal, Kohlberg Kravis will borrow about 87 percent -- or $21.7 billion -- of the total price for RJR Nabisco using the company's assets and future earnings as collateral in a standard leveraged buyout, according to documents filed with the Securities and Exchange Commission.
The remainder of the financing will come from the issuance of new preferred stock and convertible debentures. Of the borrowings, $16.7 billion will be bank loans and $5 billion will be short-term subordinated loans that will be converted to high-risk junk bonds.
Kohlberg Kravis will contribute $1.5 billion in cash with another $500 million to be raised from the sale of debt securities.
The buyout firm itself will invest only a fraction of the $1.5 billion cash outlay because the funds are coming from a pool bankrolled largely by a limited partnership of institutional investors.
'The $1.5 billion is what KKR, as a fund manager, is contributing,' said a Kohlberg Kravis spokeswoman, who declined to detail what percentage would be provided by the leveraged buyout firm itself.
Kohlberg Kravis, considered Wall Street's premier takeover firm, has previously used leveraged buyouts to acquire Safeway Stores Inc., Beatrice Cos. Inc., Owens-Illinois Inc., Stop & Shop Cos. Inc. and Duracell Inc.
The completion of the RJR Nabisco deal, expected by mid-January, will leave the balance sheet of the Atlanta-based conglomerate showing equity of $7.4 billion and debt of $22.8 billion, or a 3-to-1 debt-to-equity ratio.
In the case of the RJR Nabisco deal, the equation demonstrates that the transaction, though dwarfing the previous record $13.4 billion paid by Chevron Corp. for Gulf Oil Corp. in 1984, is actually conservative by leveraged buyout standards. Debt-to-equity ratios often can be as high as 10-to-1 and beyond, said the Kohlberg Kravis spokeswoman.
'This is the most conservatively structured leveraged buyout Kohlberg Kravis has ever done,' she said. 'It shows you don't have to sell off something immediately in order to raise cash.'
Kohlberg Kravis has said it has no plans to dismember RJRNabisco.
'It's not unreasonable for (Kohlberg Kravis) to assume their cash flow will be sufficient to service their debt,' said Neal Kaplan, an analyst who follows the company for Interstate-Johnson Lane in Charlotte, N.C.
But if needed, analysts have speculated that the food divisions of RJR Nabisco, whose familiar brand names include Planters peanuts, Oreo cookies, Del Monte foods, Triscuit and Ritz crackers and Life Savers, Baby Ruth and Butterfinger candies, could fetch from $13 billion to $15 billion.
'Companies like KKR believe there is an intrinisic economic value to a takeover target that has not been realized by management,' said Norman Newman, a partner with the law firm Baer Marks & Upham. 'But many people feel that the enormous amount of debt that is being incurred to do these deals will come back to haunt them.'
Kohlberg Kravis beat out two rival suitors, including a management group led by RJR Nabisco President F. Ross Johnson, in a six-week long takeover battle that climaxed Wednesday when Kohlberg Kravis was declared the winner by the RJR Nabisco board.
Johnson's group, which included Shearson Lehman Hutton Inc. and Salomon Brothers Inc., provided a bid that was valued at several million dollars more than the winning offer.
Management group insiders have said they lost the bid because RJR Nabisco board members were determined not to let the company come under the control of Johnson.
He apparently alienated board members during the pitched takeover battle that began with Johnson's proposal to take the company private in a deal that first included provisions to enrich him and other senior managers by as much as $100 million.
