RJR Plans to Separate Its Tobacco, Food Units

RJR Nabisco Holdings Corp., hobbled by anti-smoking lawsuits and a crushing debt burden, said Tuesday that it plans to split its cigarette and food businesses and sell its foreign tobacco group for $8 billion.

The proposed breakup is yet another example of a social movement and a legal crusade altering the fortunes of a major corporation. Litigation waged over the safety of asbestos insulation, breast implants and nuclear power have also forced major restructurings over the years in U.S. industry.

RJR makes Winston, Camel and Salem cigarettes, along with Oreo cookies, Ritz crackers, Planters nuts and Life Savers candies. But with both lines under one roof, RJR’s stock has performed poorly in recent years--in good part because of the huge tobacco-related settlements and lawsuits hanging over the company.

Stockholders and analysts have long maintained that separating RJR’s food and tobacco groups would make both operations more valuable. The chief obstacle to the move had been the threat of “fraudulent conveyance” suits accusing the company of putting valuable assets beyond the reach of anti-tobacco claimants.

But RJR said that under its plan, existing liability will attach to both the tobacco and food businesses, thus satisfying such concerns. Some anti-tobacco lawyers agreed that the plan does not seem to affect the potential liability of the nation’s second-biggest cigarette maker. Others, though, said they were reserving judgment about whether the breakup would affect their legal claims.

“I’m in a cave with a flashlight, looking through this labyrinth trying to figure out what it means,” said Russ Herman, a New Orleans attorney involved in a series of class-action suits against tobacco companies.

And in the wider context of the smoking wars, the plan--and in particular the sale of the international tobacco business--could boost the power and effectiveness of the domestic tobacco company by easing its heavy debt burden. As a result, RJR’s ability to market its brands, fight lawsuits and oppose adverse legislation could be improved.

“Seeing a weakened tobacco company become stronger doesn’t benefit the nation’s health,” said Matt Myers, general counsel for the National Center for Tobacco-Free Kids.

The complex breakup plan would unravel a company that was formed in 1985 when R.J. Reynolds Tobacco bought the Nabisco food business. Soon thereafter, the company became embroiled in the then-biggest corporate buyout in U.S. history, and the fight came to symbolize the “greed” of the 1980s.

The six-week battle to take over RJR Nabisco, ultimately won by investment firm Kohlberg Kravis Roberts & Co. with a $25-billion bid, was retold in the bestseller “Barbarians at the Gate,” which in turn became a made-for-TV movie in 1993 that starred James Garner.

But most of that $25 billion was borrowed cash, and RJR never fully recovered from being saddled with such enormous debt. Its fortunes deteriorated further during the 1990s from price wars, a decline in smoking rates and a wave of health-related lawsuits. Over the years, RJR also slipped further behind industry leader Philip Morris Cos., maker of Marlboro cigarettes, with its share of the U.S. market falling to about 25%.

RJR last fall joined other big tobacco companies in settling lawsuits brought by the states for a total of $246 billion to be paid over 25 years. Although that removed the single biggest litigation threat, RJR and its rivals still face hundreds of lawsuits by individual smokers and dozens of anti-tobacco class-action suits in courts nationwide.

Moreover, President Clinton recently announced that the Justice Department will sue the industry to recover billions of dollars spent treating sick smokers under Medicare and other federal programs. Although Wall Street welcomed the settlement with the states, the continuing litigation threat has weighed down tobacco stocks.

RJR Nabisco last year had sales of $17 billion, about equally divided between its tobacco and food lines. But with its performance and stock price sagging, shareholders such as onetime “corporate raider” Carl Icahn have pressed RJR and its chief executive, Steven F. Goldstone, to separate the tobacco and food lines.

Icahn, who owns about 7.7% of the company, could not be reached for comment Tuesday.

RJR said the breakup and the sale of its international tobacco business to Japan Tobacco Co. will put all of the pieces on a stronger footing.

“This will give the market a clear opportunity to value these companies separately,” RJR spokeswoman Carol Makovich said.

The rest of Wall Street took a more cautious view, partly because RJR said exact terms of the breakup will be announced later and because the potential tobacco-related liability won’t change under this plan, analysts said.

RJR Nabisco’s stock inched up only 13 cents to close at $28.75 on the New York Stock Exchange. And shares of Nabisco Holdings--which was created in 1995 when RJR spun off 20.4% of its food business to the public--rose only 31 cents, to $44.94, on the NYSE.

“Investors kind of scoffed at the deal,” said Gary Black, an analyst with investment firm Sanford C. Bernstein & Co. in New York. The stocks’ small advance, he said, “is appropriate because I don’t think this move adds . . . significant value.”

Black said RJR’s proposal is a response to the conflicting pressures caused by Icahn and the tobacco lawsuits. With Icahn demanding a breakup at the same time the threat of fraudulent-conveyance suits loomed, management took a middle road, he said.

The move is probably “the best thing that management can do if you have a risk-averse board [of directors] that will not spin off Nabisco,” he said. “They’re saying: ‘We’re trying very hard, shareholders. Give us a break.’ ”

Despite RJR’s claim that the breakup won’t alter its liability in smoking cases, some anti-tobacco lawyers said they were still evaluating how the proposal might affect their claims.

But Richard Daynard, a Northeastern University law professor and head of the anti-industry Tobacco Products Liability Project, said it appears the move was “neutral on liability” and would not compromise plaintiffs’ rights as RJR officials maintained.

RJR said the sale of its international tobacco business to Japan Tobacco, which is controlled by the Japanese government, will enable RJR to slash its U.S. tobacco group’s long-term debt to about $1 billion from $6.5 billion currently.

After that sale, RJR would divide its remaining businesses, creating three different companies, each with its own publicly traded stocks:

* RJR Nabisco would spin off its U.S. tobacco business to its existing stockholders, creating a new, independent company called R.J. Reynolds Tobacco Co., based in Winston-Salem, N.C.

* RJR Nabisco itself would remain a holding company, renamed Nabisco Group Holdings, and its only asset would be its 80.6% ownership of the Nabisco Holdings food business. RJR’s existing headquarters team in New York would be jettisoned, cutting about 100 jobs.

* Nabisco Holdings would continue running the Nabisco food business.

RJR Nabisco’s announcement also prompted speculation that Philip Morris, which also owns the Kraft food and Miller brewing lines, might attempt a similar restructuring. But Philip Morris spokesman Bob Minkoff said that “we have no plans to do such a transaction.”

* INTO THE SUNSET: The Marlboro Man leaves the Sunset Strip after 17 years. B1

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Major Events in RJR’s History

* 1875: R.J. Reynolds forms R.J. Reynolds Tobacco Co.

* 1898: Adolphus Green forms National Biscuit Co. and becomes famous for products such as Fig Newtons, Oreos and Premium Saltines.

* 1985: R.J. Reynolds buys Nabisco for $4.9 billion and is renamed RJR Nabisco Holdings.

* 1988: RJR Nabisco Chief Executive Ross Johnson attempts a leveraged buyout but is outbid by investment firm Kohlberg Kravis Roberts, which pays more than $25 billion.

* 1991: KKR takes the company public again with an initial stock offering.

* 1995: RJR spins off 20% of its food business into a new public company called Nabisco Holdings.

* November 1998: 46 states that had not settled claims against the tobacco industry sign a $206-billion settlement agreement with tobacco makers.

* December 1998: RJR Nabisco says it will fire 4,260 employees, or 18% of its worldwide tobacco work force.

* Tuesday: RJR announces plans to spin off its U.S. cigarette business to shareholders and sell its international tobacco unit to Japan Tobacco.

Source: Times staff and wire reports