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In March, , there were 31 product liability cases pending against RJR; compared to 97, 69, and 48 such cases at the end of , , and , respectively. The board’s five-person special committee wanted to keep the company as intact as possible and minimize turmoil and negative effects on employees. As events unfolded, the more aggressive strategy prevailed. Same interest rate provisions as on the Senior Converting Debentures described above. Subordinated Discount Debentures due

In addition, the board was concerned that, because of the size of the transaction, some of the bidders would cooperate rather than compete with each other. Perold as the basis for class discussion rather that to illustrate either effective or ineffective handling of an administrative situation. With respect to the reset provision however, KKR faced a richer array of alternatives, although just about any financial restructuring would require the consent of the banks in view of the tight restrictions imposed by the Credit Agreement discussed below. In addition, KKR’s well-structured sequential bidding strategy may well provide a role model for future buyouts. Prior to the first round of bidding, the board announced that the bidding deadline would not be extended. But RJR Nabisco is.

Tobacco-related Litigation During the s, investors were concerned that the tobacco companies would be hit with large product liability damage awards. Failure-to-warn cases focused on the years prior to when federal law began to require that consumer warnings be printed on cigarette packaging.

The indentures of the Increasing Rate Notes and the Subordinated Debentures allowed considerably more leeway regarding the issuance of additional debt and the uses of cash.

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Indentures required that on or nabsico April 28,RJR reset the rate so that the bonds would trade at par see Exhibit 1. The reset provisions of the two bonds were essentially identical and, prior to reset, the two bonds would pay the same interest rate.

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RJR Nabisco Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

The following factors led to the ultimate victory of KKR’s lower bid. This will ensure that they.

The reset bonds came into being as the “cram-down” securities in the RJR buyout. Transforming a complex set of financing instruments into a simple estimate of the cost of capital requires many approximations and simplifications.

Amounts shown were not necessarily outstanding simultaneously. What other actions should the special committee take?

rjr nabisco case study hbs

The Fixed Rate will be equal to a rate determined by Holdings’ financial advisors, on the one hand, and Rur and Lazard, on the other hand, designed to result in the Debentures trading at par on a fully distributed basis, without giving effect to the conversion feature of the Debentures.

Caes summarize below the board’s active participation in the process. The management group lost. Gives students the opportunity to explore issues facing the board of directors in a leveraged buyout. Under pressure from their constituencies, university endowments and public pension funds were beginning to divest themselves of tobacco securities. With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan.

RJR Nabisco – Case – Harvard Business School

A second alternative was to raise internal funds for a bond buyback through the sale of additional assets—the most marketable of which were believed to be RJR’s U.

Assets that are planned to be sold are included at estimated fair market value under “Net assets available for sale. KKR first attracted serious notice in when it took Houdaille Industries, the firm’s first major New York Stock Exchange-listed company, private in a leveraged buyout. On the surface, it seemed like a risky strategy, which could scare off all the bidding groups.

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RJR Nabisco Harvard Case Solution & Analysis

The board’s five-person special committee wanted to keep the company as intact as possible and minimize turmoil and negative effects on employees. Interest rate variable at the greater of 50 basis points over the IRN rate see above or an increasing spread over time over the rate on the 7 year treasury note. In March,there were 31 product liability cases pending against RJR; compared to 97, 69, and 48 such cases at the end of, andrespectively. They have also incorporated that whoever is bidding for the food segment should also tell the.

About the Author Richard S. RJR’s board proved an exception to this process: Except for the stumbling block created by Moody’s downgrade, the plan had proceeded as forecast: In particular, the board’s role in setting the bidding rules minimized the possibility of collusion and thereby increased potential gains to both shareholders and the firm’s other stake- holders.

Finance General Management Marketing. How many of the reset bonds would have to be repurchased was not obvious. Gives students the opportunity to explore the issues facing the board of directors in leveraged buyout.

rjr nabisco case study hbs

Callable at par at any time. These were the PIK reset bonds. In recent times, many companies had been repurchasing their “junk” securities: To participants in its funds, KKR charged 1.