On the face of it, the announcement that the leveraged buyout boys at Kohlberg Kravis Roberts & Co. are selling Beatrice Cos. is about as exciting as watching paint dry. Strictly snooze city. Who, except for the people directly involved, cares if a Chicago-based food conglomerate called Beatrice is being sold to an Omaha-based conglomerate called ConAgra Inc.?
Anyone with a sense of history should. Not to mention a sense of humor.
Because Beatrice, you see, is probably the last of its kind -- a successful multibillion-dollar leveraged buyout that hasn't yet been cashed out. Watching Beatrice pass from the scene ought to make any financial voyeur a bit misty-eyed, the way ornithologists must have felt when the last passenger pigeon died in 1914. Like the passenger pigeon, high-flying KKR deals once filled the sky; now, because of excessive greed, they're both gone.
Wait, there's more. Just as KKR was announcing the Beatrice sale, news was leaking out that KKR has gotten its investors to pony up big bucks to rescue the struggling RJR Nabisco LBO.
You have to love it. Here is KKR proudly cashing out Beatrice, the second-largest LBO in history, at the same time that it's quietly tapping its investors for a huge slug of new money to help bail out RJR Nabisco, the largest LBO in history. In fact, KKR wants to use more money to bail out the RJR deal than KKR investors put up to buy the whole company last year. Which gives you an idea of how things have changed in LBO land.
As it happens -- and this has to be a coincidence, because nothing like this could ever happen on purpose -- the total profit that KKR and its investors will have made if the Beatrice deal goes through happens to be about as much as KKR has apparently committed to RJR. The amount: about $1.7 billion.
Even though the $1.7 billion that KKR and its investors are making on Beatrice isn't the same $1.7 billion that's going into RJR -- the Beatrice LBO and the RJR LBO have different stockholders -- the irony is still delicious.
And so is the contrast between the Beatrice and RJR deals.
The Beatrice deal is perceived, in many quarters, to be a real stinkeroo -- but it's actually successful by almost any standard. The RJR deal, which was proclaimed a great coup for KKR before it was even completed, is starting to look more than a little crummy.
KKR took over Beatrice in 1986, promptly sold parts of it for huge prices and got lucky when a company spun off from Beatrice, E-II Holdings, got bought at a ridiculously high price by American Brands to forestall a hostile takeover bid.
Shortly before the 1987 stock market crash, the stockholders of Beatrice seemed to be more than $2 billion ahead of the game. Because the actual profit has turned out to be less than that, the Beatrice LBO has gotten a reputation for being a failure of sorts. All our investments should fail like this one.
Investors in the Beatrice buyout paid $5 a share -- $400 million in all -- for stock in the new Beatrice in 1986. So far, according to KKR, that share has produced $6.05 of cash. The share will produce another $10.20, by my calculations, if the sale to ConAgra goes through. Work out the numbers, and annual profit is a bit above 45 percent a year, compounded. KKR claims that the profit is about 50 percent a year, but won't provide details. All these numbers are after KKR's fee but before income taxes.
Even if you pay taxes -- and many of KKR's investors are tax-exempt institutions such as state pension funds and college endowments -- 45 percent a year is nothing to sneeze at. And returns like that, of course, are why investors used to line up begging KKR to take its money.
Then there's the RJR deal.
Those of us fuddy-duddies who still believe in such obsolete principles as not incurring excessive debt winced last year when KKR put only $1.5 billion of its investors' cash into the $25 billion RJR purchase.
To make the deal work, KKR issued lots of no-cash-interest securities, including $5.9 billion of low-grade paper crammed down the throats of RJR's shareholders. These securities kept the LBO from choking on its debt because they don't pay interest in cash -- they pay off at maturity -- but their relentless compounding adds more than $1 billion a year of debt to RJR's balance sheet.
None of this left much of a margin for error. And it turned out there was plenty of error. The junk bond market vaporized, banks began to think before making loans to borrowers already burdened by debt, the value of assets began to decline instead of rise. KKR was stuck.
But rather than walk away from the $1.5 billion it has already invested in RJR and turning the company over to its bondholders, KKR is trying to rescue the buyout.
Having the Beatrice cash-out and the RJR rescue during the same week is as good a way as any to mark the end of one financial age and the start of another. The age of huge, almost assured profits in big leveraged buyouts is past. The age of huge, almost assured problems is just beginning.
Allan Sloan is a columnist for Newsday in New York.