RJR NabiscoA Leveraged Buyout

Special Committee

Leo LeungAaron Ng

Marcus LamJennie LiuWendy Ma

Agenda• LBO Evaluation• Value of Company

Pre-bidManagementKKR

• Sources of Gains• Use of One-Round Auction• Bid Recommendation

LBO Evaluation• Low debt level• Sufficient tangible assets• Steady growth of sales and stream of

cash flows• Not a volatile industry• Little capital investment required• Undervalued

Good Candidate

Pre-Bid Operating Strategy

• E(rd):1987 interest expense / debt level

• E(re): CAPMRisk Free Rate: 10-year US T-Bills in 1989Market return: 1982 to 1987 NYSE annual returnBeta: 1987 regression data

)()1)(( ed rEED

EtrEED

DWACC

Pre-Bid Operating Strategy

• Projected cash flows 1989 to 1998: Cash flows available for capital

paymentsFuture growth after 1998: 3%

1187.)1451(.133,11204,5

133,11)34.1)(0940(.133,11204,5

204,5

Pre-Bid Operating Strategy

• Present value of cash flows: $28,276• Current Debt: $5,204• Equity: $23,072• Number of Shares: 247.4• Value per Share: $93.26

Management’s Operating Strategy

• E(rd) 1989 to 1998 interest expense / avg. debt level

• E(re): CAPMRisk Free Rate: 10-year US T-Bills in 1989Market return: 1982 to 1987 NYSE annual returnBeta: 1987 regression data

)()1)(( ed rEED

EtrEED

DWACC

Management’s Operating Strategy

• Present value of cash flows: $34,512• Current Debt: $5,204• Equity: $29,308• Number of Shares: 247.4• Value per Share: $134.24

1026.)1517(.202,4186,11

202,4)34.1)(1276(.202,4186,11

186,11

KKR’s Operating Strategy

• Present value of cash flows: $38,416• Current Debt: $5,204• Equity: $33,212• Number of Shares: 247.4• Value per Share: $118.46

1106.)1584(.4115932,18

4115)34.1)(1518(.4115932,18

932,18

Sources of Gains• Pre-Bid

From continuous operations• Management

From continuous operations through better management

Sale of food business Cost cutting & operational improvements Tax shields

• KKR From continuous operations Sale of non-essential assets Cost cutting & operational improvements Tax Shields

Use of One-Round Auction• Pros

Forces bidders to deliver their most competitive offer

Most time and cost efficientBids are more comparable

• ConsDoes not allow for follow-up counter offers

• AlternativeMultiple-round auction

Management Bid

Not converted ConvertedCash: $90 $90PIK preferred: $ 6 $ 6Convertible: $ 4 $18.26

$100 $114.26

@85% projected firm value: $111.52 @115% projected firm value: $116.99Note: Convertible stock is callable by company

KKR Bid

Not converted ConvertedCash: $75 $75PIK preferred: $ 11 $ 11Convertible: $ 8 $26.67

$94 $112.67

@85% projected firm value: $108.67 @115% projected firm value: $116.67

Value Comparison

• Pre-Bid: $93.26• Management: $134.24• KKR: $118.46

• Management Bid: $100.00• KKR Bid: $112.67

Bid Recommendation Management KKR

Value Higher LowerEquity Lower HigherDebt Higher LowerPIK Lower HigherCallable Yes NoCash offer Higher LowerTotal offer Lower Higher

Better Offer!

Questions?