The $25B Christmas Coup by KKR

In December 1988, Kohlberg Kravis Roberts & Co. (KKR) made headlines with a $25 billion leveraged buyout of RJR Nabisco, a tobacco and snack food giant behind brands like Oreos. The deal was the largest of its time and exposed the cutthroat ambition and greed driving Wall Street's elite in the late ’80s.

This week, we break down how KKR orchestrated the Christmas takeover that became one of the most famous deals in corporate history:

• 💼 A $25 billion deal that made history

• 🏦 The fierce bidding war for RJR Nabisco

• 📉 The aftermath of the 1980s buyout craze

— Investor Briefcase Team

In the late 1980s, RJR Nabisco was a household name, with products ranging from Nabisco Oreos to Winston cigarettes. However, under CEO F. Ross Johnson, the company became known for lavish spending, including a fleet of private jets and excessive perks for executives. The final straw for shareholders was Johnson’s $800 million attempt to launch Premier, a smokeless cigarette designed to change the tobacco industry. Premier flopped spectacularly, fueling investor backlash.

Frustrated by public scrutiny and fearing he might lose control of his company, Johnson proposed a $17.6 billion buyout to take the company private in October 1988.

While the buy-out plan outraged investors, particularly over Johnson’s $53 million personal payout, it sparked excitement on Wall Street. Private equity firms, like KKR, saw RJR Nabisco’s cash flow and dominant brands as a rare opportunity, setting the stage for a bidding war to take control of the firm.

What began as a $17.6 billion management buyout turned into one of the most intense bidding wars in Wall Street history. Private equity firms, including KKR, First Boston, and Shearson Lehman Hutton, raced to outbid one another for control of RJR Nabisco.

KKR, led by Henry Kravis and George Roberts, made an aggressive opening bid of $90 per share. As the competition escalated, bids to take control of the firm before the end of Christmas climbed above $110 per share.

While Johnson’s team submitted the highest bid of $112 per share, shareholders feared it would lead to widespread layoffs and burden Nabisco with unsustainable debt, ultimately making the deal worthless.

KKR’s bid of $109 was ultimately chosen on the final vote by the shareholders. Their offer included secured financing and a detailed plan to address RJR Nabisco’s inefficiencies by selling off company jets and removing over-the-top management salaries, winning over public investors.

KKR’s success in closing the buyout just before Christmas, valued at over $25 billion dollars, marked a turning point in the private equity industry. The deal was not only the largest of its kind, but also became the start of leveraged buyouts dominating the financial markets.

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While the RJR Nabisco deal was the first of its kind, its results for investors were not the Christmas present they had hoped for. The enormous debt from the $25 billion price tag weighed heavily on the company, limiting its ability to recover from operational missteps like Premier.

For KKR, the financial returns were modest. The firm earned $75 million in fees, equivalent to $180 million today, but investors saw a low internal rate of return (IRR) of less than 1%. Despite this, the deal cemented KKR’s reputation as a leader in private equity and influenced the evolution of leveraged buyouts.

The Christmas Coup became synonymous with 1980s corporate excess and ambition, inspiring the book Barbarians at the Gate and its movie adaptation. It remains a defining case study of the risks and rewards of large-scale private equity transactions that have only gotten larger in size over the years.

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Other infamous leveraged buyouts

> TXU (Energy Future Holdings): In 2007, KKR, TPG Capital, and Goldman Sachs acquired TXU for $45 billion, relying heavily on debt, leading to bankruptcy due to the financial crisis and falling natural gas prices.

> HCA Healthcare: In 2006, KKR and Bain Capital acquired HCA Healthcare for $33 billion. Despite high interest rates, HCA's steady cash flow allowed it to manage the borrowed money effectively, making this LBO a success.

> First Data Corp: In 2007, Kohlberg Kravis Roberts & Co. (KKR) acquired First Data Corp for $29 billion. The deal was one of the largest LBOs in history and involved significant restructuring to manage the debt.

> Hilton Hotels: In 2007, Blackstone Group acquired Hilton Hotels for $26 billion. The deal was highly leveraged, and Blackstone had to navigate the financial crisis to eventually turn Hilton into a profitable investment.

Each week we profile the most notorious investment stories.

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