Barbarians at the Gate

by Bryan Burrough

  “You tell him he has an office and secretary wherever he wants it,” Johnson replied. “Zaire; you name it.” The Heublein sale went through without a hitch.

  Johnson thought he had the board in the palm of his hand, but Horrigan wasn’t so sure. He saw how, when Johnson’s language turned blue, their heads sometimes jerked back as though they had been slapped in the face. He wished Johnson would quit wearing gold necklaces and open-collar shirts at board social occasions. Horrigan finally warned him. Maybe it was just his “natural Irish suspicion,” Horrigan said. “But this isn’t your board, Ross. They’re just waiting for you to make a mistake.”

  Most people were waiting for Johnson to make his next move. Every year he seemed to come up with something new, whether the Reynolds—Nabisco merger, the move to Atlanta, or the half-cocked limited partnership idea. Johnson’s Ferrari had one of America’s largest engines—$1.2 billion in tobacco cash flow—and a clear highway ahead. The question was, where did he want to go?

  For a year after moving to Atlanta, Johnson made do trimming RJR Nabisco, selling Heublein and a host of small companies. Out went the venerable Prince Albert pipe tobacco, Mr. RJ’s first national product, along with the rest of the Reynolds pipe tobaccos, Carter Hall, Apple, and Royal Comfort. A line of cigars called Winchester was also sold. In Canada, Emmett was selling businesses as fast as they could go: a half-dozen divisions for $350 million.

  As money from these and other divestitures poured into RJR Nabisco’s coffers, Johnson used it only to pay down bank debt. Investment bankers pestered him constantly to put the funds to better use. Buy something, they urged. Put your imprint on the company. But Johnson wasn’t interested in building anything.

  One recurrent rumor had him buying part of Beatrice, the Chicago food giant taken private in 1986 by the leading LBO boutique, Kohlberg Kravis Roberts & Co. Johnson, in fact, was mildly drawn to Beatrice’s Hunt Wesson unit, because some of its businesses would be a snug fit with Del Monte. And Beatrice’s La Choy Chinese food might fit well with Nabisco’s Chun King. But his interest was desultory at best.

  Johnson knew Beatrice’s chief, a witty Irishman from Chicago’s South Side named Don Kelly. Kelly had transformed the old Swift meat-packing business into a high-flying conglomerate known as Esmark. He had sold out to Beatrice, then reemerged as that company’s chief executive after Kohlberg Kravis took the company private. The $3 billion profit they projected to turn had stunned the financial world. Johnson was getting tired of hearing Kelly brag about how rich they all were becoming.

  Eric Gleacher, an investment banker who headed Morgan Stanley & Co.’s merger department, had been badgering Johnson for months to meet with Kelly and the lead partner at Kohlberg Kravis, Henry Kravis. Finally, Johnson agreed. But when Gleacher arrived at RJR Nabisco’s New York offices at Nine West Fifty-seventh on the appointed morning, he found Johnson had changed his mind.

  “We’re not going to do it, Eric,” Johnson said. “It’s such crap we’re not even interested. We don’t want to embarrass Henry, but these are marginal businesses at best. Why waste their time and ours?”

  “Then why have you been going through the motions?” Gleacher wondered.

  Johnson said he was just trying to be polite to Kelly. “Anybody that buys this stuff from Kelly is going to be a real fool,” he told Gleacher. “I’m not going to be Don Kelly’s patsy.”

  Then Ira Harris came into the picture. Harris was the dean of Chicago investment bankers, and had known both Johnson and Kelly for years. A poor kid from the Bronx, Harris had risen through the ranks of stockbrokers to become one of America’s premier deal makers. He was rotund, always fighting a weight problem, and loved to play golf. For years, as Salomon Brothers’s man in Chicago, he had played matchmaker to the Windy City’s biggest companies. After a falling out with Salomon Chairman John Gutfreund, he had quit for a spell of leisure, ending it in 1987 to join another Wall Street firm, Lazard Freres & Co.

  Now, as the summer wound down, Harris called Johnson and suggested a round of golf at one of Johnson’s favorite clubs, Deepdale, on Long Island. Kelly had never played there and wanted to see it, Harris said, and Johnson agreed. They hit the links at a quarter past twelve one day in the first week of September, three big spenders playing a $3 Nassau. With his ten handicap, Johnson was the best golfer of the group. But Kelly made good use of the extra strokes his fourteen handicap afforded and won the entire $9 pot.

  Afterward they sat on the clubhouse terrace, downing a round of drinks while Kelly talked about the incredible benefits of LBOs, especially one with Henry Kravis. “Ross,” he said, “you’d be doing exactly what you’re doing as a CEO, but you’re making a helluva lot more money.”

  Johnson knew that. As part of his earlier LBO studies, he had had Frank Benevento calculate Kelly’s cut of the Beatrice profits. It came out to $400 million. Still, Johnson reacted coolly to the idea of an LBO at RJR Nabisco. “I’m happy doing what I’m doing,” he said, “and money’s no big problem for me.”

  Besides, Johnson said, look at the size of RJR Nabisco. At $6.2 billion, Beatrice was the largest LBO ever. In recent days RJR Nabisco stock had traded in the low seventies. “Good God, if you want to do that you’re talking in the eighties or nineties,” Johnson said. “To have any kind of premium, you’re talking a helluva lot of money.” Some quick arithmetic told how much: $90 for each of RJR Nabisco’s 230 million shares outstanding. Twenty billion dollars!

  “You should meet Henry,” Kelly persisted. “He’s curious to meet you. I could set up a dinner with him.” Johnson was intrigued. Kravis, whose name was practically synonymous with LBOs, was a legend on Wall Street. Kohlberg Kravis controlled more than two dozen companies it had acquired, using borrowed money, since its founding in 1976. It wasn’t every day, Johnson mused, you got the chance to meet a legend.

  Ten days later Johnson arrived at Kravis’s Park Avenue apartment, where he found Kelly waiting. Johnson stared goggle-eyed at Kravis’s sumptuous quarters. He thought he spied a Renoir or a Monet on the wall. Hell, Johnson told himself, the guy could live well off the liquidation value of his living room. They dined in an alcove off the dining room, which was dominated by a massive John Singer Sargent portrait of the 6th Marquis of Londonderry.

  Kravis was a small, intense man with silvery hair, just forty-three. He spent much of the dinner extolling LBOs, how pouring on debt made a company tighten its operations, how executives could reap millions from little extra effort. “If you’re interested, maybe we could get together,” Kravis said. “If you’d like, we could send out people to look at your numbers.”

  “Well, who would run this thing?” Johnson wondered. “How does that work?”

  “Ask Don,” Kravis said, motioning to Kelly.

  As if on cue, Kelly rhapsodized about his wonderful, hands-off working relationship with Kohlberg Kravis, which, after all, owned majority control of Beatrice. Johnson was skeptical, although he kept his tongue. “I didn’t just fall off the turnip truck,” he would recall. “You knew goddamned well that if somebody puts in that kind of money, they’re going to be up your ass to make sure that what you say you’re going to do, you’re going to do.” Johnson wasn’t interested in working for anyone other than himself.

  When the talk got a tad specific for Johnson, he switched subjects, spending much of their remaining time heralding the soon-to-be-introduced Premier. Kravis listened politely, but clearly had other matters on his mind. Dinner soon ran its course, and Johnson rose to leave after scarcely ninety minutes. He left feeling Kravis was a bright, steady young man. He also felt sure they could never do business.

  The following Monday morning, Johnson sat down with Benevento and Sage at Nine West and took another look at the possibility of an LBO. Benevento had dusted off Project Sadim and run the numbers through the computer once more. The basics of an LBO were relatively simple and familiar to all three men. A firm such as Kohlberg Kravis, working with a company’s management, buys the comp
any using money raised from banks and the public sale of securities; the debt is paid down with cash from the company’s operations and, often, by selling pieces of the business.

  Sitting in Johnson’s corner office, Benevento showed Johnson how a buyout of RJR Nabisco could work. Factoring in a $90-a-share purchase price, Benevento estimated the company’s cash flow over the next five years, then compared it to the debt necessary to buy the company. To make it work, he cautioned, they would have to sell off everything except Reynolds Tobacco.

  Johnson scanned Benevento’s work, paying particular attention to the coverage ratios, the cushion between cash flow and debt payments. They were simply too thin. Post-LBO companies were run in a notoriously spartan manner to conserve cash. As much as he tried, Johnson simply couldn’t drum up any enthusiasm for cutting costs, not to mention his precious perks. “I don’t like it,” he said. “There’s just not enough cash coverage here for me to be comfortable. Christ, you can’t run the company on this basis.”

  The lure of personal wealth was strong, but Johnson couldn’t see risking his already-lush life-style just to get more. “I already consider myself a very lucky man,” he said. “I started off with practically nothing. I have more money than I ever dreamed I would have, and I’ll be drawing a $700,000 salary when I retire. Who needs the aggravation?” Sage agreed.

  Johnson turned to Benevento. “Frank, forget about the goddamned LBOs, you’re chasing the wrong horse. Let’s throw some business Drexel’s way for bringing us some of these ideas, but let’s just take care of our own business now.”

  For the rest of their ninety-minute session the trio discussed other ideas, including selling the ESPN stake and buying a British candy business. As they rose to leave, Johnson walked over to his window and looked south over midtown Manhattan. In the distance he could barely see Wall Street. For now, the lure of its fancy schemes failed to grip him. “You know,” he said, gazing out, “I hope that five years from now the three of us are still here being the strategic brain trust of this company.”

  Chapter

  4

  Good, bad, or indifferent, you’re always thinking, you’re doing, you’re extending yourself. If you don’t do that, the place becomes a bore. You’ve got to create some excitement.

  —ROSS JOHNSON

  On October 19, 1987, the stock market crashed. Like the rest of the financial world, Johnson tuned in his Quotron and slipped into a state of shock. RJR Nabisco, which had been trading in the mid-sixties the week before, plunged into the low forties by midday. In the crash’s wake, the stock languished there for weeks.

  It was the beginning of Johnson’s road to ruin, for the low stock price would haunt him for months to come. In December the company posted a 25 percent profit increase, and the Street ignored it. Even when food stocks rose that winter, RJR Nabisco remained in the dumps. No matter what Johnson did, buyers treated his stock like a tobacco stock, even though 60 percent of its sales came from Nabisco and Del Monte.

  In Atlanta, Johnson simmered. Like many chief executives, he considered his stock price something of a report card. As he watched other food stocks soar, Johnson felt like a wallflower at the orgy. If the business he knew best was hot, Johnson was determined to be a player. He began pondering the possibility of linking up with a food company.

  His first thought was Pillsbury. It was an unstable situation, his favorite kind, with takeover speculation swirling around a chief executive just come out of retirement. Buying the company, though, ran against Johnson’s grain. He was a seller, not a buyer. He considered a joint venture. Why not combine Pillsbury and Nabisco, sell its stock to the public, and thereby highlight the remaining food assets inside RJR Nabisco?

  Johnson tossed the idea to Sage and Benevento, who were hugely unimpressed. Pillsbury was a dog, they said, its core businesses anemic. “Why would you want to own part of a so-so food business rather than one hundred percent of a great one?” asked Benevento. As Sage typed what they called a “stick-it-in-your-ear” memo to Johnson, Benevento looked over his shoulder. A thought struck him. General Motors, faced with a similar problem, had created separate classes of stock for the parent company and its Hughes Aircraft and Electronic Data Systems units. If Johnson was worried that tobacco was dragging down the price of his food stock, why not make them trade as separate securities? If GM could have an H stock for Hughes, why couldn’t RJR have an F stock for food? They tacked it on the end of the memo. When Johnson saw it he shrugged, then gave Benevento the go-ahead to look at the dual-stock plan. It was just another idea.

  Johnson wasn’t the only one who noticed RJR Nabisco’s low stock price. In January the syndicated columnist Dan Dorfman mentioned the company as a takeover candidate. Johnson pooh-poohed the notion, although some of his aides, including Ed Robinson, grew worried. Then, as February’s board meeting broke up, Paul Sticht approached Johnson. The two hadn’t talked much since Sticht’s ouster six months earlier. “Ross, are you going to be down in Florida this weekend?” Sticht asked.

  “Yeah,” Johnson replied, “I’ve got to go down and do my dad’s taxes.”

  “Are you going to have any spare time?”

  “Really, I’m not,” Johnson said, eager to avoid any invitation from Sticht. “I’m up to my tail.”

  “Well, there’s a very important shareholder, and you should get to know him,” Sticht said. “He’s got some ideas, and he’s going to be down in Lost Tree. His name is Spangler.” Johnson reluctantly agreed to meet Sticht and his friend Spangler the following Saturday in Jupiter.

  Clemmie Dixon Spangler, Jr., was the president of the University of North Carolina. Before taking its helm in 1986, “Dickie” Spangler had been a bona fide big wheel in North Carolina business circles: president of C. D. Spangler Construction Co. of Charlotte, and chairman of the Bank of North Carolina, which, when it was sold to giant NCNB Corp. in 1982, made him a rich man. His family was also one of RJR Nabisco’s largest shareholders.

  Spangler had been incensed when Johnson pulled the headquarters out of Winston-Salem. He had called an old Harvard Business School classmate, Richard H. Jenrette, chairman of The Equitable Life Insurance Society, one of the nation’s largest insurance companies. Dick Jenrette was a native North Carolinian and knew the Spangler family well. Spangler wanted to know if The Equitable, among the nation’s most powerful institutional investors, would be interested in backing some sort of shareholder vote in an attempt to reverse the move to Atlanta.

  “You think we could get enough votes to stop that from happening?” Spangler asked.

  Frankly, Jenrette replied, “No.”

  Jenrette put the call out of his mind. Then, several months later Spangler called again. “Dick,” he said, “what would you think about forming a group to do a leveraged buyout of Reynolds? I think it can be done.” Spangler mentioned that he planned to approach Paul Sticht and also hoped to interest Jim Robinson of American Express, with whom he had prepped at Woodberry Forest in Virginia.

  Jenrette mulled the offer for several days before deciding it would appear unseemly for a major insurance company—one that doled out millions each year to cancer victims—to invest in a cigarette maker. “I’ve got to back off on it,” he told Spangler.

  Spangler stewed as RJR Nabisco stock plummeted during the crash. He blamed his losses—and North Carolina’s—squarely on Ross Johnson. He approached Sticht through a mutual friend, John Medlin of Wachovia. “If I could get the funds to take control of the company, would you be interested in helping me put things back the way they were?” Spangler asked.

  Sticht played coy. “Gee,” he said, “I don’t think that’s possible or practical.” But when Spangler invited him to an exploratory meeting in New York, Sticht accepted. The meeting turned out to be with a group of Citibank executives. Spangler had interested the mammoth bank in financing an LBO of RJR Nabisco.

  Sticht was impressed. He was also practical. LBOs weren’t a hostile device. If Spangler’s group wanted to bu
y RJR Nabisco, they would have to involve Johnson. “Can you arrange for me to meet with him?” Spangler asked.

  And so Johnson found himself on a Saturday morning in late February unlocking the Team Nabisco office in Jupiter. Seeing Sticht was keeping him from his golf game, and he hoped they could wrap it up quickly. When he was introduced to Spangler, Johnson’s first thought was that he and Sticht made a splendid pair. Dickie Spangler’s slicked-back hair and clear-framed glasses were straight out of the fifties.

  “I really don’t have anything to do with this,” Sticht began. “Dick has come to me. He has some ideas. And I think he should talk to you.”

  RJR Nabisco was a great company, Spangler began. It had great prospects, though it remained undervalued.

  Blinding glimpse of the obvious, Johnson thought.

  Spangler prattled on about how he felt silly he hadn’t sold his stock at seventy and how he felt bad that it now languished at fifty. His family was peeved with him for not selling.

  “I can’t tell you when it’s going back to seventy,” Johnson said, “all I can do is run the company.” He was dying to get on the fairway.

  Spangler proceeded to his idea: an LBO, at $70 dollars a share or so. He and Sticht had already met with Citibank about it, Spangler said, and the bank was enthusiastic.

  Johnson was stunned. He and Sticht had what?

  “Now my role is strictly advisory,” Sticht interjected.

  Johnson looked at Sticht and thought: Your role is strictly ambushing, you old dinosaur. But Johnson wasn’t built for confrontation, and fighting with these two wasn’t going to get him anywhere, so he smiled. “Seventy dollars is okay by me, Paul.” It was a vintage performance.

  Johnson would be the key, Spangler continued. He would own 15 percent of the company, with other managers owning another 10 percent. “Ross, I know a lot of wealthy people,” Spangler said. “You could be a billionaire.”