NEW YORK (CNNfn) - R.J. Reynolds Tobacco Holdings might consider a bid for its former corporate parent, Nabisco Group Holdings Inc., if Nabisco is successful selling its food business, according to a top Wall Street analyst.|
Martin Feldman, who follows tobacco stocks for Salomon Smith Barney, said that despite reports about a family reunion between the two, he believes RJR would be interested only in buying the cash shell left if Nabisco sells its only unit, Nabisco Holdings Corp. (NA: Research, Estimates), the food company whose brands include Ritz crackers, Oreo cookies and Life Savers candy.
"The family reunion is a nice media expression. It's not really realistic at all. RJR has no interest in going back into the food business," Feldman told CNNfn's In the Money Friday. "Now it looks like it can buy $30 in cash for something less than that."
Nabisco Group Holdings (RGH: Research, Estimates), which owns 80.6 percent of the food company, sees its stock trading at a discount to its stake in the food company due to the threat that it could be sucked into tobacco litigation if its former RJ Reynolds (RJR: Research, Estimates) unit ever goes bankrupt.
Other tobacco analysts don't believe the deal will ever happen, though.
"Nobody is going to finance that deal," predicted Roy Bury, analyst with Brown Brothers Harriman & Co. "You'd be taking a big litigation risk without any upside. It'd be dumb for anyone to lend them money."
Nabisco Group Holding's market capitalization, while below the $8.8 billion value of its stake in the food business, is $5.7 billion, or more than twice the RJR market cap of $2.4 billion.
But Feldman said there would be no additional litigation risk for Reynolds should it buy the remaining shell of the company because the litigation risk would be related to RJR's existing exposure. (268KB WAV) (268KB AIFF).
An official with R.J. Reynolds said the company had no comment on Feldman's comments, first made in a report Thursday, or on an article about the speculation that appeared in Friday's Wall Street Journal. The Journal article quoted unnamed sources familiar with the matter who said RJR is discussing a bid.
Nabisco Group Holdings started exploring an auction for its food business last month after it rejected a bid by financier Carl Icahn for the holding company. Feldman said he believes the bids for the food business would come in around $45 a share, which would translate into about $30 a share for the holding company. He believes RJR could bid about $22 a share for the cash shell after any deal.
Icahn, who owns 9.5 percent of Nabisco, has said he would be willing to offer $16 a share to purchase Nabisco Group Holdings.
Tobacco rival Philip Morris Cos. (MO: Research, Estimates), which also owns several food brands under its Kraft Foods division, is reportedly interested in Nabisco in order to buy the food business at a discount and operate it. France's Danone may be among the other suitors for the food company, the report said.
Shares of Nabisco Group Holdings gained 3/4, or about 5 percent, to 17-3/8 in trading Friday, while Nabisco Holdings shares gained 3/8 to 41-5/16 and RJR shares fell 3/16 to 22-5/8.
Past deals involving the companies are somewhat of a legend on Wall Street. In 1985, R.J. Reynolds bought food business Nabisco Brands. Three years later, in October 1988, RJR Nabisco's management, led by then chairman Ross Johnson, put a $17.6 billion offer on the table in a bid to take the company private.
That prompted Kohlberg Kravis Roberts & Co. (KKR) to make a $20.6 billion counteroffer. It eventually won out, buying RJR Nabisco on Nov. 30, 1988, for about $25 billion, in history's largest leveraged buyout.
KKR eventually sold off the company through an IPO. In June 1999 RJR Nabisco shed the tobacco operations through a spinoff of stock to shareholders, and it dropped the RJR prefix at that time.