Sale of RJR Tobacco International
A sale as big and complex as the TI divestiture requires a lot of painstaking work. Tom Pierce and Jack Koach described how time-consuming and difficult the process was.
To begin, Pierce said that the early efforts in late 1998 to sell TI had almost led to a personal tragedy for him. He was supposed to fly to Geneva for a meeting, but it moved to London at the last minute. He was booked on Swissair Flight 111, but he canceled and rebooked to London. Swissair Flight 111 was scheduled from New York City to Geneva. On 2 September 1998, the plane crashed into the Atlantic Ocean southwest of Halifax, five miles from shore. All 229 passengers and crew died.
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In January 1999, Goldstone proposed an auction to sell TI, a step toward dividing the tobacco companies and Nabisco. He expected five bidders. This sent Tom Pierce to Geneva and then to London, this time for a prolonged stay. Pierce recounts the day and night activity that always takes place in a major acquisition – an atmosphere of secrecy, urgency, general logistical confusion, flaring tempers, and very high stakes for both buyer and seller.
RJR Nabisco hired Merrill Lynch and Morgan Stanley as co-investment bankers for the deal. The group worked almost around the clock for eight weeks putting together materials in Geneva. Pierce made three sets of thirty-two color-coded data books for potential buyers – one was in Geneva, one at a law firm in London, and one with Deloitte & Touché, the TI accounting firm. Potential buyers set a date to review the books in London. Tom limited each bidder to twenty people for three days in the data room. He provided them fax machines to send questions to Geneva.
Pierce needed a great deal of clerical help, but under the European work system, he could not get it. The people working there would not honor his request to help because it was not part of their job. Paul Bourassa, a TI attorney in Geneva was “a savior” at that point, even volunteering his wife Josee-Anne to help. Fortunately, he never had to prevail on her kind offer.
Many of the potential buyers came with more than their allotted twenty people. One brought fifty. Some employed retired RJR people as their consultants to look over the data. Pierce rented a hotel ballroom for the data analysts. He paid for food, bar bills, and rooms. Conflicts erupted from time to time – one of the investment bankers told one of the bidders that their questions were “stupid.”
Pierce recalls, “In the hours I was allowed to sit with the Philip Morris International (PMI) merger & acquisition team, they did not talk about buying the entire company, but discussed among themselves that if they could see their way to make an offer on TI, they would come back and request all relevant data on Nabisco and make a package offer for both companies.” PMI never get beyond the Federal Trade Commission type issues that they faced in Germany, so nothing happened with them. Tom Pierce never told RJR Nabisco executive management about their comments as it wasn’t relevant to the TI sale. However, he was not surprised when Philip Morris bought Nabisco the following year.
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Pierce said that Steve Goldstone told PMI that $6 billion was not enough but offered to get back to them before a final offer was accepted. JTI offered $7.8 billion and Goldstone gave them a tentative “yes “and said that he would probably finalize with them the following day. He called Philp Morris and told them of the $7.8 billion offer and gave them twenty-four hours to respond. PMI still couldn’t overcome the FTC trade legal issues, and they passed.
PMI had other issues with the deal that they may not have shared with Pierce. Jack Koach, TI’s Chief Legal Counsel in Geneva, was also working on legal matters that, in the end, also discouraged PMI.
Koach said, “No one at headquarters in New York knew anything about international tobacco. The Geneva people basically had the unenviable job of selling themselves. They would play the major role in a dog and pony show, preparing offering documents, and answering questions. Thus, Tom Pierce’s fax line from London to Geneva. There were lots of bidders – Japan Tobacco (JT), PMI, BAT, REEMTSMA, and Imperial. Even a private equity group with no tobacco experience took a look.
TI’s operating committee plus the four strategic business unit (SBU) heads were available for presentations. Some questions arose about smoking and health, but mostly about cigarette smuggling. The European Union had raised some anti-trade issues and there was a major question about litigation in Canada involving Macdonald Tobacco, a part of TI.
The choice came down to PMI and JT as the buyer. The head of Philip Morris told Goldstone he would give $8 Billion, but he stipulated that bidding must stop and PMI wanted a prepaid option for fifteen years to buy Canada. If PMI later chose not to take Canada, RJRN could keep the option money. Under this deal, RJRN had to keep Canada, but Goldstone wanted a clean break – no Canada stub left. There had been an indictment of some TI people and the future of Canada was at the best uncertain. The RJRN people told Koach to come to New York and talk to Philip Morris, but oddly, he was not permitted to tell his boss Lebouchere. Koach sat with lawyers from Philip Morris and their outside counsel, a Richmond, Virginia law firm, along with attorneys from RJRN’s outside counsel. Koach said he was there for a week, in meetings “from 7 to 7” and only ate law firm food. Apparently, not the greatest of experiences, although he admits “maybe he did visit a bar or two.”
Meantime, TI had a backchannel to Japan through a TI person, David Guilfoile. Guilfoile was well versed in Japanese culture. Having lived there for many years, he spoke fluent Japanese and his wife was Japanese. Japan Tobacco had been a TI distributor in Japan, so a relationship already existed.
Koach, Guilfoile, and Lebouchere were conflicted because “If PMI wins, we are all gone. Lausanne is nearby and will take over TI in Geneva.” The three of them guided the Japanese on what they must do to win the bidding. Philip Morris was saying to RJR Nabisco, “You handle the smuggling issue in Canada,” and the Japanese wanted Jack Koach’s assessment of how Canada would play out. The Japanese agreed to a $7.8 billion price. They would accept Canada as part of the deal and were willing to allow TI production to continue at Tobaccoville in America for a few more years. PMI would not. Jack Koach never knew what Goldstone was going to finally do. The Geneva people were just the messengers bring information from JT.
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Koach was in New York when Goldstone announced that Japan Tobacco had won. He worked with JT’s New York attorneys, who, he discovered, also did not know anything about international tobacco. “They were putting crazy things in the purchase agreement to JT’s detriment.” Koach knew he would be working for them and admitted that he was tempted to “jump to the other side” and tell them, for example, “Be careful about buying leaf tobacco – not all of it is good.” Jack was in an ethical dilemma. He had already “walked the line” once with Japan versus Philip Morris, and he couldn’t do that again, because RJRN was still his employer. To his credit, he conducted himself well in very difficult circumstances.
People in Geneva were, of course, concerned. The announcement came during the week. Lebouchere flew back to Geneva, but Jack Koach remained in NYC. All the Geneva staff were called to a meeting at the parking deck at the Chemin Rieu headquarters. It was the only space large enough to accommodate everyone. They had to clear out all the cars, but Koach’s car had been left there while he was away. They had to call Jennifer, Jack’s wife, for car keys, but she didn’t know where they were, so they left Jack’s car in the parking garage, in the middle of the meeting.