What makes an attractive LBO candidate?

An LBO candidate is considered to be attractive when the business characteristics show sustainable and healthy cash flow. Indicators such as business in mature markets, constant customer demand, long term sales contracts, and strong brand presence all signify steady cash flow generation.

Why would a company agree to an LBO?

Advantages. Leveraged buyouts allow the buyer to acquire a business without investing more than 10\% to 15\% equity. LBOs enable buyers to use equity efficiently. Buyers can buy larger companies than they could otherwise buy if they used lower levels of debt.

What happened to RJR Nabisco stock?

Shareholders of the current RJR Nabisco will get the shares in that operation. The remainder will be Nabisco, which will have two kinds of common stock. One type, the Nabisco Holdings shares that already trade, will have a stake in the profits from such products as Chips Ahoy and Ritz Crackers.

What is the purpose of an LBO model?

The aim of the LBO model is to enable investors to properly assess the transaction and earn the highest possible risk-adjusted internal rate of return (IRR) In other words, it is the expected compound annual rate of return that will be earned on a project or investment..

When was the RJR Nabisco LBO?

1988
RJR Nabisco was formed in 1985 when Nabisco merged with RJ Reynolds tobacco. By 1988, the time of the LBO, the company was lead by CEO F. Ross Johnson. Originally from Canada, Johnson was known for a risky, bold decision making process inside the board room and a lavish lifestyle outside of it.

Which company bought Nabisco?

Kraft Foods
In 1999, Nabisco acquired Favorite Brands International. In 2000, Philip Morris Companies Inc. acquired Nabisco and merged it with Kraft Foods in one of the largest mergers in the food industry. In 2011, Kraft Foods announced that it was splitting into a grocery company and a snack food company.

Which factors make RJR Nabisco suitable as an LBO target?

RJR Nabisco’s operations exhibited moderate and consistent growth, required little capital investment and carried low debt levels. All these features made it a particularly attractive LBO candidate. Though it had problems of declining ROA and falling inventory turnover, they appeared fixable.

How did KKR do with RJR Nabisco?

In 1995, with RJR Nabisco struggling, Kohlberg Kravis unloaded its stake, but not for cash. Instead, it traded its stake for ownership of Borden Inc., an over-leveraged, publicly traded dairy and chemical conglomerate.