Former RJR Nabisco chief dies

F Ross Johnson was chief executive officer of RJR Nabisco in the 1980s, when the firm was the subject of a vicious private equity bidding war chronicled in the book Barbarians at the Gate.

F Ross Johnson, chief executive of food and tobacco company RJR Nabisco in the late 1980s during a bidding war that inspired Barbarians at the Gate, died on 29 December.

According to reports, Johnson suffered from pneumonia leading up to his death at age 85. He was at his home in Jupiter, Florida.

A spokesman for Johnson’s Atlanta-based family office, RJM Group, told Private Equity International a memorial service will be held in Jupiter on 7 January.

The Canadian-born, self-made entrepreneur made headlines when he competed against KKR in 1988 to take RJR private. 

Although Johnson and company management had made a bigger offer – $112 a share versus KKR’s $109 a share, according to news reports at the time – the executives lost. KKR’s $25 billion bid – the then largest private equity buyout ever – eventually won the RJR board’s approval. In 2000, Phillip Morris purchased Nabisco for $15 billion.

But Johnson, who was known for his lavish lifestyle that included private jets and rugs valued at six figures decorating his office floor, left RJR with approximately $50 million in severance in 1989 two months after the deal closed.

In 2008, Private Equity International profiled some of the key players on the 20th anniversary of the bidding war on RJR. Here are the main points PEI reported:

• KKR’s final price tag on RJR was $31.4 billion, including debt.
• KKR’s 1987-vintage fund, which invested in RJR, contributed $2 billion in equity and bridge financing to the transaction, leaving RJR with a debt burden of about $25 billion – almost five times the pre-buyout debt obligations of the company.
• The fund was the firm’s worst-performing vehicle, returning an internal rate of return of 12 percent, compared with 26 percent gross IRR across all funds and an all-time high of 48 percent produced by its 1982-vintage fund.
• As such, KKR co-founder George Roberts told one of its largest investors in the 1987 fund, Oregon Public Employees Retirement System, that “we don’t consider that a successful deal by any stretch of the imagination”.
• KKR had planned to sell much of its debt, but the junk bond market began to dry up, forcing KKR to refinance its high-yield securities much earlier than anticipated. Making matters worse, rating agency Moody’s downgraded RJR’s debt in December 1989, making it difficult to refinance.
• Due to competitors’ price cutting to drive sales, RJR’s cigarette market share lost 2 percent by the end of 1994, costing KKR $900 million in profits.
• Congress called on all US tobacco companies for hearings on the health implications of smoking in 1994, resulting in threats of billions of dollars of potential lawsuits. As a result, KKR couldn’t exit RJR, and instead swapped its remaining 40 percent stake in the company for full control of Ohio-based manufacturer Borden.
• KKR exited Borden in a $1.2 billion sale to Apollo Global Management in 2005; KKR’s limited partners earned an IRR of less than 1 percent on the RJR investment.

During the initial bidding war, Forstmann, Little & Company had also gone toe to toe with KKR. Forstmann Little co-founder Ted Forstmann passed away at age 71 in 2011.