Description
This is a PPT discussing on RJR Nabisco Case.
? Some
genius invented the Oreo. We’re just living off of the inheritance.
F. Ross Johnson
? Fair
Market Value: “…the price at which the asset would trade between two rational individuals, each in command of all of the information necessary to value the asset, and neither under any pressure to trade.” Rocky Higgins Analysis for Financial Management (p. 318)
? Step
1: Estimate Discount Rate ? Step 2: Project Cash Flows
? ?
Cash flows for 1989-98 in tables Terminal value
? Step
?
3: Compute Net Present Value (NPV)
Accept positive NPV projects
? As
we discussed, the discount rate is the weighted average cost of capital (WACC).
D E WACC ? E (rd )(1 ? t ) ? E (re ) D?E D?E
where t = tax rate, E(rd) = expected cost of debt D = amount of debt in capitalization E(re) = expected cost of equity E = amount of equity capitalization
?
To calculate the WACC using 1989 figures under the three strategies:
5,204 12,790 Prebid : (.09)(1 ? .34) ? (.168) ? .137 5,204 ? 12,790 5,204 ? 12,790
11,186 4,202 Mgmt : (. 098 )(1 ? .34 ) ? (.250 ) ? .115 11,186 ? 4,202 11,186 ? 4,202 18,932 4115 KKR : (. 102 )(1 ? .34 ) ? (. 330 ) NOTE: since the capital structure changes over time, we need to ? .114 18,932 ? 4115 18 change in capital structure. recompute the WACC each year to reflect the,932 ? 4115
?
?
Projected cash flows for 1989 are calculated as follows:
Rev. - Exp. - Depr. TI - Tax Net Inc.
+ Depr.
Prebid Mgmt 18,088 7,650 14,429 5,544 807 777 2,852 1,329 970 1,882 807 1,708 80 0 901 452 877 777 432
KKR 16,190 12,596 1,159 2,435 828 1,607 1,159 774 79 3,500 5,413
- Cap.Exp. - Chg WC
+ Asset
41 12,680 13,861
Sale Net CF
?
The following cash flow represent the cash flow computed from the tables:
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Prebid Management KKR 901 13,861 5413 1385 1486 4909 1856 1768 2526 2528 2062 2745 2985 3261 3555 3887 4246 4575 2278 2507 2755 3029 3332 3666 2855 3101 3364 3651 3970 4319
To estimate a terminal value, we need to make an assumption about future growth after 1998. ? If cash flows grow by 2.5% per year (and the WACC remains constant), then for the pre-bid strategy:
?
4575(1 ? .025) PV (1998) ? ? 38,755 .146 ? .025 ? For the Management Group scenario:
3666 (1 ? .025 ) PV (1998 ) ? ? 31,055 ? For the KKR scenario:.146 ? .025
4319 (1 ? .025 ) PV (1998 ) ? ? 36,587 .146 ? .025
?
Results will depend on the growth rate assumption. Values in 1998 of cash flows for 1999 and beyond for different assumptions are (“Sensitivity Analysis”):
Strategy Pre-Bid Management KKR 0% 31,336 25,110 29,582 2.5% Growth Rate 5% 38,755 31,055 36,587 50,039 40,097 47,239
?
?
The present value of the cash flows for the prebid strategy is (using the 2.5% growth rate assumption after 1998): ($ millions)
901 1385 1856 PV ? ? ? ? 2 3 1.137 (1 ? .139) (1 ? .14)
... ?
?
4575 ? 38,755 ? 22,607 10 (1 ? .146)
This represents the total value of RJR Nabisco (ASSETS).
?
To figure out the value per share of RJR Nabisco to the CURRENT shareholders, consider the prebid valuation: Total Assets = 22,607 Current Debt = 5,204 Equity = 17,403
17,403 PerShare ? ? 70.34 247 .4
?
Estimates of the value per share under the alternatives (again, using the 2.5% growth rate assumption):
Strategy Prebid Management KKR Total 22,607 30,593 29,278 Debt 5204 5204 5204 Equity 17,403 25,389 24,074 Share Price $70.34 $102.62 $97.31
The company is worth substantially more under either the KKR or the Management Group plan. ? There are smaller differences between the KKR value and the management value. ? The buyout plans propose to
?
?
?
? ? ?
increase debt trim excesses decrease capital expenditures sell food assets decrease operating profits
?
All gains are based on projections.
? Per
share bids:
11/29/88 106 103-115
Case (11/18) MGMT $100 $101 KKR 94 FB 98-110
? Concluded
that First Boston bid was impractical. ? Began to negotiate terms with KKR. ? Letter from Management Group protesting negotiations with KKR, offering to negotiate all aspects of its proposal. ? Special Committee decided to consider new bids.
? Summary
of final bids (substantially equivalent): Bid Valuation MGMT $112 $108 KKR 109 108 ? Chose KKR:
more equity (25% vs 15% for mgmt) ? retain more businesses ? fewer PIK securities ? more benefits to terminated employees.
?
? Fundamentals
of firm valuation: discounted cash flow techniques. ? Relation between managerial decisions and firm cash flows.
?
Operating decisions can create or destroy value.
? Role
of a corporate governance system that encourages value-enhancing decisions.
doc_328568417.ppt
This is a PPT discussing on RJR Nabisco Case.
? Some
genius invented the Oreo. We’re just living off of the inheritance.
F. Ross Johnson
? Fair
Market Value: “…the price at which the asset would trade between two rational individuals, each in command of all of the information necessary to value the asset, and neither under any pressure to trade.” Rocky Higgins Analysis for Financial Management (p. 318)
? Step
1: Estimate Discount Rate ? Step 2: Project Cash Flows
? ?
Cash flows for 1989-98 in tables Terminal value
? Step
?
3: Compute Net Present Value (NPV)
Accept positive NPV projects
? As
we discussed, the discount rate is the weighted average cost of capital (WACC).
D E WACC ? E (rd )(1 ? t ) ? E (re ) D?E D?E
where t = tax rate, E(rd) = expected cost of debt D = amount of debt in capitalization E(re) = expected cost of equity E = amount of equity capitalization
?
To calculate the WACC using 1989 figures under the three strategies:
5,204 12,790 Prebid : (.09)(1 ? .34) ? (.168) ? .137 5,204 ? 12,790 5,204 ? 12,790
11,186 4,202 Mgmt : (. 098 )(1 ? .34 ) ? (.250 ) ? .115 11,186 ? 4,202 11,186 ? 4,202 18,932 4115 KKR : (. 102 )(1 ? .34 ) ? (. 330 ) NOTE: since the capital structure changes over time, we need to ? .114 18,932 ? 4115 18 change in capital structure. recompute the WACC each year to reflect the,932 ? 4115
?
?
Projected cash flows for 1989 are calculated as follows:
Rev. - Exp. - Depr. TI - Tax Net Inc.
+ Depr.
Prebid Mgmt 18,088 7,650 14,429 5,544 807 777 2,852 1,329 970 1,882 807 1,708 80 0 901 452 877 777 432
KKR 16,190 12,596 1,159 2,435 828 1,607 1,159 774 79 3,500 5,413
- Cap.Exp. - Chg WC
+ Asset
41 12,680 13,861
Sale Net CF
?
The following cash flow represent the cash flow computed from the tables:
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Prebid Management KKR 901 13,861 5413 1385 1486 4909 1856 1768 2526 2528 2062 2745 2985 3261 3555 3887 4246 4575 2278 2507 2755 3029 3332 3666 2855 3101 3364 3651 3970 4319
To estimate a terminal value, we need to make an assumption about future growth after 1998. ? If cash flows grow by 2.5% per year (and the WACC remains constant), then for the pre-bid strategy:
?
4575(1 ? .025) PV (1998) ? ? 38,755 .146 ? .025 ? For the Management Group scenario:
3666 (1 ? .025 ) PV (1998 ) ? ? 31,055 ? For the KKR scenario:.146 ? .025
4319 (1 ? .025 ) PV (1998 ) ? ? 36,587 .146 ? .025
?
Results will depend on the growth rate assumption. Values in 1998 of cash flows for 1999 and beyond for different assumptions are (“Sensitivity Analysis”):
Strategy Pre-Bid Management KKR 0% 31,336 25,110 29,582 2.5% Growth Rate 5% 38,755 31,055 36,587 50,039 40,097 47,239
?
?
The present value of the cash flows for the prebid strategy is (using the 2.5% growth rate assumption after 1998): ($ millions)
901 1385 1856 PV ? ? ? ? 2 3 1.137 (1 ? .139) (1 ? .14)
... ?
?
4575 ? 38,755 ? 22,607 10 (1 ? .146)
This represents the total value of RJR Nabisco (ASSETS).
?
To figure out the value per share of RJR Nabisco to the CURRENT shareholders, consider the prebid valuation: Total Assets = 22,607 Current Debt = 5,204 Equity = 17,403
17,403 PerShare ? ? 70.34 247 .4
?
Estimates of the value per share under the alternatives (again, using the 2.5% growth rate assumption):
Strategy Prebid Management KKR Total 22,607 30,593 29,278 Debt 5204 5204 5204 Equity 17,403 25,389 24,074 Share Price $70.34 $102.62 $97.31
The company is worth substantially more under either the KKR or the Management Group plan. ? There are smaller differences between the KKR value and the management value. ? The buyout plans propose to
?
?
?
? ? ?
increase debt trim excesses decrease capital expenditures sell food assets decrease operating profits
?
All gains are based on projections.
? Per
share bids:
11/29/88 106 103-115
Case (11/18) MGMT $100 $101 KKR 94 FB 98-110
? Concluded
that First Boston bid was impractical. ? Began to negotiate terms with KKR. ? Letter from Management Group protesting negotiations with KKR, offering to negotiate all aspects of its proposal. ? Special Committee decided to consider new bids.
? Summary
of final bids (substantially equivalent): Bid Valuation MGMT $112 $108 KKR 109 108 ? Chose KKR:
more equity (25% vs 15% for mgmt) ? retain more businesses ? fewer PIK securities ? more benefits to terminated employees.
?
? Fundamentals
of firm valuation: discounted cash flow techniques. ? Relation between managerial decisions and firm cash flows.
?
Operating decisions can create or destroy value.
? Role
of a corporate governance system that encourages value-enhancing decisions.
doc_328568417.ppt