Tax shields

1989

1990

1991

1992

1993

Prebid Strategy
Management Strategy
KKR Strategy

145.79
738.74
728.69

153.99
357.99
619.41

175.16
340.27
528.39

183.36
313.01
499.55

182.57
274.38
349.53

PV
Prebid Strategy
Management Strategy
KKR Strategy

145.79
738.74
728.69

134.78
313.33
542.14

134.18
260.66
404.78

122.94
209.87
334.95

107.14
161.02
205.12

Asset Sales

1989

Prebid Strategy
Management Strategy
KKR Strategy

1990

0
12680
3500

1991
0
0
2700

1992
0
0
0

1993
0
0
0

0
0
0

PV
Prebid Strategy
0
Management Strategy
12680
KKR Strategy 5863.171731
Capex

1989
Prebid Strategy
Management Strategy
KKR Strategy
Terminal Value
PV
Prebid Strategy
Management Strategy
KKR Strategy

Operating improvements

1990

1991

1992

1993

1,708
432
774

1,462
381
556

1,345
380
555

930
389
572

738
396
586

1708
432
774

1279.61
333.47
486.64

1030.35
291.10
425.16

623.56
260.82
383.52

433.09
232.39
343.89

1989

1990

1991

1992

1993

Prebid Strategy
Management Strategy
KKR Strategy

2898
1917
2862

3336
2385
3228

3838
2814
3811

4216
3266
4140

4634
3589
4508

PV
Prebid Strategy
Management Strategy
KKR Strategy

2898
1917
2862

2919.83
2087.47
2825.30

2940.14
2155.69
2919.46

2826.80
2189.83
2775.84

2719.46
2106.20
2645.51

Column1
Prebid Strategy

Tax Shield
910.62

Asset Sales
0.00

Capex
8100.84

Operating Inc
46902.38

Management Strategy
KKR Strategy
Average

1909.93
2512.03
1777.53

12680.00
5863.17
6181.06

3525.80
5541.58
5722.74

35760.13
44541.65
42401.39

% Value
Prebid Strategy
Management Strategy
KKR Strategy

Tax Shield
51%
107%
141%

Asset Sales
0%
205%
95%

Capex
142%
62%
97%

Operating Inc
111%
84%
105%

250%
200%
Sources of Value:

150%
100%
50%
0%

Prebid Strategy
Management Strategy
KKR Strategy

Management Strategy

1994

1995

1996

1997

1998

174.10
224.90
287.88

157.17
165.11
213.26

121.18
92.87
128.86

108.48
0.00
5.56

68.53
0.00
0.00

Terminal Value
627.25
0.00
0.00

89.43
115.52
147.86

70.66
74.23
95.87

47.68
36.54
50.70

37.36
0.00
1.91

20.66
0.00
0.00

Sum of PV
910.62
1909.93
2512.03

1994

1995
0
0
0

1994

1996
0
0
0

1995

1997
0
0
0

1996

1998
0
0
0

1997

0
0
0

1998

735
402
598

735
412
618

735
422
638

735
432
658

735
442
678

377.52
206.48
307.16

330.43
185.22
277.83

289.21
166.05
251.04

253.13
148.78
226.61

1775.93
1269.48
2065.73

1994

1995

5093
3945
4906

2615.96
2026.30
2519.91

50000.00
45000.00
40000.00
35000.00
30000.00
25000.00
20000.00
15000.00
10000.00
5000.00
0.00

5596
4337
5341

2515.75
1949.75
2401.11

1996
6149
4768
5815

2419.50
1876.10
2288.08

1997
6756
5243
6335

2326.71
1805.64
2181.72

Growth Rate Terminal Value

0
5156.73
2%
3769.56
3%
6175.15

Sum of PV
8100.84
3525.80
5541.58

1998
7424
5766
6902

Terminal Value
67951.34
52775.79
63173.51

22720.24
17646.14
21122.73

Sum of PV
46902.38
35760.13
44541.65

Tax Shield
Asset Sales

50000.00
45000.00
40000.00
35000.00
30000.00
25000.00
20000.00
15000.00
10000.00
5000.00
0.00

Tax Shield
Asset Sales
Capex
Operating Inc

ources of Value:
Pre-bid Operating Income fueled by Capital expenditure
Management Strategy More distributed. They will sell assets, as well as earn on Tax Shields
KKR Tax Shields, Assets as well as operating efficiecies

Terminal Value Growth Rate assumption

3%

Terminal Value Growth Rate assumption

3%

Interest
Prebid Strategy
Management Strategy
KKR Strategy

1989
551
2,792
2,754

1990
582
1,353
2,341

1991
662
1,286
1,997

1992
693
1,183
1,888

1993
690
1,037
1,321

1994
658
850
1,088

Tax rate 0.264593

Tax Shield = Interest*Tax Rate 1989
1990
1991
1992
1993
1994
Prebid Strategy 145.7908 153.9932 175.1606 183.363 182.5692 174.1022
Management Strategy 738.7439 357.9944 340.2667 313.0136 274.383 224.9041
KKR Strategy 728.6894 619.4124 528.3924 499.5517 349.5275 287.8773

1995
594
624
806

1996
458
351
487

1997
410
0
21

1998
259
0
0

1995
1996
1997
1998
157.1683 121.1836 108.4832 68.52961
165.1061 92.87217
0
0
213.262 128.8568 5.556455
0

Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in millions of
dollars, except per share data).
1982
1983
1984
1985
1986
Operations:
Revenues
$7,323
$7,565
$8,200
$11,622 $15,102
Operating income
1,142
1,205
1,412
1,949
2,340
Interest and debt expense
180
177
166
337
565
Income before provision for income taxes
1,012
1,110
1,353
1,663
1,782
Income from continuing operations
548
626
747
917
1,025
Income from discontinued operationsa
322
255
463
84
39
Net income
870
881
1,210
1,001
1,064
Tax
142
229
143
662
718
Tax rate
14.0%
20.6%
10.6%
39.8%
40.3%

Source: Casewriter.
a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.

-1987 (in millions of

1987
$15,766
2,304
489
1,816
1,081
128
1,209
607
33.4%

26.5%

es - change in working capital.

Column1
1986
Beta Equity
1.24
Debt
5547
Equity
13991.1
Value
19538.1
Asset Beta 0.887955533
Average Beta 0.694803178
MRP
Risk free rate

9%
8%

Pretax WACC 0.142532286

1987
0.67
4219
12571.875
16790.875
0.5016508222

Assumption
Assumption

Exhibit 2 Exhibit 2 Condensed Operating and Stockholder Information for RJR Nabisco, 1982-1987 (in
millions of dollars, except per share data).
1982
Operations:
Revenues
Operating income
Interest and debt expense
Income before provision for income taxes
Income from continuing operations
Income from discontinued operationsa
Net income
Stockholder Information:
Earnings per share
Dividends per share
Closing stock price at year end
Price/earnings at year end
Numbers of shares at year end (millions)b
Betac

1983

1984

1985

1986

1987

$7,323
1,142
180
1,012
548
322
870

$7,565
1,205
177
1,110
626
255
881

$8,200
1,412
166
1,353
747
463
1,210

$11,622
1,949
337
1,663
917
84
1,001

$15,102
2,340
565
1,782
1,025
39
1,064

$15,766
2,304
489
1,816
1,081
128
1,209

$3.13
1.14
20.40
6.5x
281.5
0.80

$2.90
1.22
24.30
8.38x
283.2
0.70

$4.11
1.30
28.80
7.01x
258.4
0.74

$3.60
1.41
31.38
8.72x
250.6
1.21

$3.83
1.51
49.25
12.86x
250.4
1.24

$4.70
1.76
45.00
9.57x
247.4
0.67

Source: Company reports and Casewriter estimates.

a

Divestitures and acquisitions for the years 1982 to 1987 are as follows:

1982Heublein acquired for $1.36 billion.

1983Energy Division sold for an after-tax gain of $275 million.
1984Divestiture of transportation division completed by spinning off common stock to Sea-Land Corp. (transportation accounted for as a
discontinued operation since 1983).
1985Nabisco brands, Inc., acquired at a total cost of $4.9 billion.
1986Kentucky Fried Chicken sold at an after-tax loss of $39 million.
1987Heublein, Inc. sold at an after-tax gain of $215 million.
b

Figures include a 2 1/2-for-1 stock split, effective May 17, 1985.

Calculated using daily stock price data for each year by ordinary least-squares regression.

Exhibit 3

Consolidated Balance Sheets for RJR Nabisco, 1986-1987 (in millions of dollars).
1986

Assets:
Cash
Net receivables
Inventories
Other current assets
Property, plant and equipment, net
Goodwill and other intangibles
Net assets of discontinued operations
Other assets
Total assets
Liabilities:
Notes payable
Accounts payable
Current portion of long-term debt
Income taxes payable
Long-term debt
Deferred income taxes
Redeemable preferred stock
Other noncurrent liabilities
Total liabilities
Stockholders equity
Total liabilities and stockholders equity

Source: Company reports.

1987

$827
1,675
2,620
273
5,343
4,603
716
644
$16,701

$1,088
1,745
2,678
329
5,847
4,525
-649
$16,861

$518
2,923
423
202
4,833
751
291
1,448
$11,389
5,312
$16,701

$442
3,187
162
332
3,884
846
173
1,797
$10,823
6,038
$16,861

4,219

Exhibit 4

Financial Summary of RJR Nabisco by Business Segment, 1982-1987 (in millions of dollars).
1982

1983

1984

1985

1986

Tobacco:
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$4,822
1,187
3,219
81
238
36.9%
--

$4,807
1,150
3,378
78
383
34.0%
--

$5,178
1,305
3,812
107
527
34.2%
--

$5,422
1,483
4,496
146
647
33.0%
--

$5,866
1,659
4,882
205
613
34.0%
--

$6,346
1,821
5,208
244
433
35.0%
(261)

Food Products:
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$2,501
21
1,710
51
84
1.2%
--

$2,758
129
1,761
56
94
7.3%
--

$3,022
181
2,211
68
86
8.2%
--

$6,200
549
9,598
195
279
6.0%
--

$9,236
820
9,822
376
344
8.0%
--

$9,420
915
10,117
380
445
9.0%

Spirits and Wines:

Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$392
53
1,084
14
11
4.9%
--

$746
$703
$766
$876
113
122
131
138
740
815
895
991
24
22
24
30
13
13
26
25
15.3%
15.0%
14.6%
14.0%
-----

Other (including corporate):a

Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures
Operating profit/identifiable assets
Restructuring expense

$-(66)
3,106
11
16
-2.1%
--

$-(74)
3,197
16
15
-2.3%
--

$-(74)
2,257
16
29
-3.3%
--

$-(83)
1,684
13
20
-5.0%
--

Source: Company reports.

a

Includes earnings on cash and short-term investments and miscellaneous discontinued operations.

$-(139)
1,319
24
65
-10.5%
--

1987

18

$--------

$-(182)
1,536
28
58
-11.9%
(7)

Exhibit 5

Cash Flow Projections for RJR Nabisco Under Its Prebid Strategy, 1988-1998 (in millions of dollars).

Tobacco sales
Food sales
Total
Operating income
Tobacco
Food
Corporate
Total
Interest
Net income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Cash flow available for capital paymentsa

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,061
9,889
16,950

7,650
10,438
18,088

8,293
11,383
19,676

8,983
12,092
21,075

9,731
12,847
22,578

10,540
13,651
24,191

11,418
14,507
25,925

12,368
15,420
27,788

13,397
16,393
29,790

14,514
17,428
31,942

15,723
18,533
34,256

1,924
1,079
-350
2,653
551
1,360
730
1,142

2,022
1,163
-287
2,898
582
1,498
807
1,708
80
517

2,360
1,255
-279
3,336
662
1,730
791
1,462
111
948

2,786
1,348
-296
3,838
693
2,023
819
1,345
98
1,399

3,071
1,459
-314
4,216
690
2,259
849
930
105
2,073

3,386
1,581
-333
4,634
658
2,536
866
738
113
2,551

3,733
1,713
-353
5,093
594
2,858
867
735
121
2,869

4,115
1,855
-374
5,596
458
3,251
867
735
130
3,253

4,534
2,011
-396
6,149
410
3,625
867
735
140
3,617

4,998
2,178
-420
6,756
259
4,094
867
735
151
4,075

5,508
2,361
-445
7,424
-21
4,625
861
735
162
4,589

Source: Casewriter.
a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital.

Exhibit 6
dollars).

Cash Flow and Capital Structure Projections for RJR Nabisco Under the Management Group Strategy, 1989-1998 (in millions of

Panel A: Operating Information

Sales
Operating income
Interest
Amortizationa
After-tax income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Net proceeds from asset sales
Cash flow available for capital paymentsb
Panel B: Capital Structure
Principal payments to:
Assumed debt
Bank debt
Subordinated debt
Preferred stock
Convertible preferred stock
Total
Year-end book values:
Assumed debt
Bank debt
Subordinated debt
Total
Preferred stock
Convertible preferred stock
Common stock
Total
Source: Casewriter.

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

7,650
1,917
2,792
388
-965
777
432
41
12,680
12,018

8,293
2,385
1,353
388
293
725
381
45
0
593

8,983
2,814
1,286
388
621
726
380
48
0
919

9,731
3,266
1,183
388
987
735
389
52
0
1,282

10,540
3,589
1,037
388
1,297
749
396
57
0
1,594

11,418
3,945
850
388
1,655
754
402
61
0
1,946

12,368
4,337
624
388
2,063
758
412
67
0
2,344

13,397
4,768
351
388
2,527
763
422
72
0
2,797

14,514
5,243
0
388
3,073
769
432
78
0
3,332

15,723
5,766
0
388
3,418
774
442
85
0
3,666

310
11,708
0
0
0
12,018

375
218
0
0
0
593

721
198
0
0
0
919

816
466
0
0
0
1,282

400
1,194
0
0
0
1,594

728
1,217
0
0
0
1,946

1,854
0
490
0
0
2,344

0
0
2,510
287
0
2,797

0
0
0
3,332
0
3,332

0
0
0
3,327
339
3,666

4,894
3,292
3,000
11,186
1,632
1,035
1,535
4,202

4,519
3,075
3,000
10,594
1,938
1,229
1,828
4,995

3,798
2,877
3,000
9,675
2,303
1,460
2,449
6,212

2,982
2,411
3,000
8,393
2,736
1,735
3,436
7,907

2,582
1,217
3,000
6,799
3,250
2,061
4,733
10,044

1,854
0
3,000
4,854
3,861
2,448
6,388
12,697

0
0
2,510
2,510
4,587
2,909
8,451
15,947

0
0
0
0
5,162
3,455
10,978
19,595

0
0
0
0
2,801
4,105
14,051
20,957

0
0
0
0
0
4,538
17,469
22,007

The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The
difference between the purchase price and book value is amortized over 40 years using the straight-line method.
a

Cash flow available for capital payments = net income + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds from asset
sales.
b

Exhibit 7

Cash Flow and Capital Structure Projections for RJR Nabisco Under KKR's Strategy, 1989-1998 (in millions of dollars).
1989

Panel A: Operating Information

Tobacco sales
Food sales
Total
Operating income
Tobacco
Food
Corporate
Total
Interest expense
Amortizationa
After-tax income
Depreciation, amortization & deferred tax
Capital expenditures
Change in working capital
Noncash interest expense
Net proceeds from asset sales
Cash flow available for capital paymentsb
Panel B: Capital Structure
Principal payments to:
Assumed debt
Bank debt
Subordinated debt
Preferred stock
Total
Year-end book values:
Assumed debt
Bank debt
Subordinated debt
Converting debtc
Total
Preferred stock
Common stock

1990

1991

1992

1993

1994

1995

1996

1997

1998

###
###
###

###
###
###

###
###
###

###
###
###

4,998
1,561
-224
6,335

5,508
1,630
-235
6,902

7,650
8,540
###

8,293
6,930
###

8,983
7,485
###

9,731
8,084
###

###
8,730
###

###
9,428
###

2,022
1,060
-219
2,862
2,754
388
-281
1,159
774
79
206
3,500
3,732

2,360
1,026
-158
3,228
2,341
388
233
991
556
84
237
2,700
3,521

2,786
1,191
-167
3,811
1,997
388
845
899
555
87
312
0
1,414

3,071
1,245
-176
4,140
1,888
388
1,134
907
572
94
366
0
1,740

3,386
1,307
-185
4,508
1,321
388
1,751
920
586
102
0
0
1,983

3,733
1,367
-194
4,906
1,088
388
2,168
924
598
110
0
0
2,383

310
3,422
0
0
3,732

375
3,146
0
0
3,521

721
816
400
400
2,182
0
0
0
693
924
1,583
1,983
629
0
0
0
0
0
0
0
21
3,330
149
0
0
0
0
0
0
0
3,806
4,319
1,414
1,740
1,983
2,383
2,832
3,330
3,956
4,319

4,894
8,958
3,500
1,580
###
2,896
1,219

4,519
5,812
3,500
1,817
###
3,331
1,452

3,798
5,119
3,500
2,129
###
3,958
2,297

2,982
4,195
3,500
2,495
###
4,702
3,430

2,582
2,612
3,500

4,115
1,430
-203
5,341
806
388
2,641
928
618
119
0
0
2,832

4,534
1,494
-213
5,815
487
388
3,164
933
638
129
0
0
3,330

21
0
388
388
3,814
4,203
939
945
658
678
140
151
0
0
0
0
3,956
4,319

2,182
0
0
629
0
0
3,500
3,470
149
0
0
0
0
8,694
6,311
3,470
149
5,586
6,636
7,883
9,365
7,320
7,676
9,844
###
###
###

0
0
0
0
0

0
0
0
0
0
4,377
###

Total

4,115

4,783

6,255

8,132

###

###

###

###

###

###

Source: Casewriter.
The amortization of goodwill of $338 million per year is from the proposed acquisition of RJR Nabisco at $22.9 billion which had the book value of $7.4 billion at the end of 1988. The
difference between the purchase price and the book value is amortized over 40 years using the straight-line method.
a

Cash flow available for capital payment = net income + noncash interest + depreciation, amortization, and deferred tax - capital expenditures - change in working capital + net proceeds
from asset sales.
b

Assumes converting to equity in 1993.