RJR moves to split food, tobacco lines

November 01, 1994|By New York Times News Service

NEW YORK -- The RJR Nabisco Holdings Corp. took a big step yesterday that some analysts predicted would lead to a separation of its food operations and its tobacco business.

In a long-anticipated move to free its fast-growing food business from the taint of tobacco that has held down the company's stock price, RJR Nabisco announced a plan to sell 19 percent of its Nabisco foods unit. Proceeds from the offering, expected to be as much as $1 billion, would be used to pay off debt.

Still, even becoming a completely separate operation might not protect the food company from potential legal consequences as smokers pursue lawsuits contending that they were harmed by their use of cigarettes.

Also yesterday, RJR Nabisco, the New York-based maker of Camel cigarettes and Snackwell's Cookies, backed out of a preliminary agreement to buy 20 percent of the stock of Borden Inc. from Kohlberg, Kravis, Roberts & Co. Since Kohlberg Kravis owns 35 percent of RJR Nabisco, the decision prompted Wall Street to speculate about the relationship between RJR and its largest shareholder. It also raised questions about the effect on Kohlberg's deal with Borden and on the future of Borden.

RJR Nabisco stock was up 12.5 cents for the day, closing at $7 on the New York Stock Exchange. That stood in sharp contrast to shares of Philip Morris, the world's largest cigarette maker, which were down $2.75, closing at $61.25, in response to a ruling by a Florida judge regarding a class-action suit over tobacco.

Although the Florida ruling and RJR's announcement were coincidental, they offered a visible demonstration of the reason RJR Nabisco might seek to distance its food operations even further from the legal liabilities of tobacco.

"There is a vast difference between the valuation of the Nabisco food company and the tobacco business," said Roy D. Burry, a tobacco analyst for Kidder Peabody. "I think that very quickly we'll see a positive effect on the stock."

The offering of 45 million shares of Class A common stock, at $23 to $26 a share, will leave RJR in control of 81 percent of the new food company. RJR also announced that it would set a regular quarterly dividend of 7.5 cents a share on RJR Nabisco common stock, the first since Kohlberg Kravis took RJR public in 1991.

In taking the initial step toward separation, the RJR Nabisco board said it would not consider selling the remaining 81 percent of Nabisco shares to stockholders for at least two years. But that may be little more than a delaying action, some analysts said. "The spinoff has already happened," said Mr. Burry of Kidder, Peabody, "though it is a fractional spinoff."

As for yesterday's decision to back away from the Borden deal, it raised questions not only about the future shape of RJR Nabisco but also about what will happen to Borden.

In September, Kohlberg Kravis, a specialist in leveraged buyouts, committed itself to buy Borden stock in a swap for $2 billion of its holdings in RJR Nabisco.

In a separate transaction, RJR tentatively agreed to purchase 20 percent, or $500 million, of the Borden shares from Kohlberg Kravis. Yesterday, RJR decided not to make the purchase, citing disagreement over "certain accounting issues." Without the participation of RJR Nabisco, Kohlberg Kravis will be the sole owner of Borden.

Analysts have said that the $500 million stock infusion into Borden from RJR Nabisco was important to the plans of Kohlberg Kravis, since it could be used to pay down debt. The lack of that money "will increase the pressure on KKR to sell off Borden's assets," one industry industry executive said.

Ruth Pachman, a spokesman for Kohlberg Kravis, denied this. "The financing was nice to have," she said, "but it was in no way central to the transaction."

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