How OREO ended up in India

OREO biscuit is one of the first cream biscuits available in the world. It began selling in US almost 100 years ago. This is not the story of oreo…it is about the companies that owned the brand oreo…   Nabisco( National Biscuit Company) of united states started making OREO in 1912 and it was a big hit.However, over the years due to some mismanagement and focus on immediate profits, Nabisco’s bakeries became outdated and desperately required cash infusion to overhaul their bakeries.This was around 1970s. At the same time the top tobacco company at that time R.J.Reynolds ( RJR in short) was fighting off lawsuits and health concerns about tobacco. This affected RJR’s stock price significantly. To help diversify, the management of RJR looked to enter confectionary business. More than 20 years later, the Indian tobacco major ITC is following the same strategy and entered biscuit business with SunFeast and other brands.   Anyway, in 1975, RJR and Nabisco merged and it seemed like a perfect merger with the excess cashflow from the tobacco business being utilized to revamp and build new bakeries for Nabisco. However, the stock market did not react positively and the stock price of RJR Nabisco was languishing at 45$ per share. The management felt that the company was grossly undervalued in the stock market.Lead by Ross Johnson, the management  hatched a plan to takeover the company and delist it from the stock market.   To buy out a company, there are two ways – pay cash from your own pocket( almost never happens nowadays) or pay money by borrowing money and pledging the bought company as security! This is called a Leveraged Buyout(LBO). You Leverage the assets of a company to secure a loan to buy the company! Typically companies with strong cash flows are ideal candidates for LBOs since the excess cash can now be utilized to pay down debt.   Ross Johnson consulted with lot of banks and finally settled on offering to buy the RJR Nabisco for 75$ a share using debt. His plan was to sell Nabisco after the buyout and use the cashflow of tobacco business to pay the rest of the debts and finally own a company without the stress of publicly traded stock price.   Unfortunately, for him, one of the companies he consulted was KKR( no…not Kolkota Knight Riders) – Kohlberg Kravis Roberts & Co. In fact, it was Henry Kravis of KKR who first suggested to Johnson to  takeover the company with the financial muscle of KKR.   KKR is a known LBO expert. They buy companies with borrowed money and with the help of management trim costs mercilessly to help pay down debts. Once the company is debt free they then sell it again at huge profits. Some of the companies that KKR took over are NXP Semiconductors, Toys “R” Us and SunGard.   Henry Kravis of KKR was angry at Johnson for not picking KKR as the partner for LBO. KKR sent a counter hostile bid of 90$ per share which was way over management bid. Johnson had carefully picked the board of directors and assumed that the board would help him out. However, Kravis’s 90$ bid made the board think and act impartially and announce both the bids to the public. This led to a bidding war with several other banks including Goldman Sachs enter the fray. However, when the bids reached close to 120 $ there was only 2 bids left since there was not enough money in the entire world to support more than 2 bids( 19 billion $ each).   Anyway, due to Directors impartial conduct, RJR Nabisco finally went to KKR  at 120$ per share –  the largest takeover at that time(1989 – 19 billion). The record was broken only in 2006 ( again by KKR).   Once KKR assumed control of RJR Nabisco, it had to sell of assets to pay off the incredible amount of debt. After selling off smaller assets KKR finally sold Nabisco to Kraft’s food in year 2000. Kraft’s food is itself owned by another tobacco company Philip Morris. Hence Nabisco and Oreo has been owned by both the top two tobacco companies in the world!   All the above information is presented in great detail in the book  Barbarians at the Gate: fall of RJR Nabisco written by Bryan Burrough and John Helyar.   However, this does not explain what OREO is doing in our cafeteria now. The story moves forward to year 2010 when Kraft Foods made a hostile bid to takeover Cadbury and succeeded. I am sure someone will write a good book on the happenings between Cadbury, Kraft’s and Hershey( the other bidder for Cadbury) during the takeover.   With the takeover of Cadbury, Kraft foods became the largest confectionary company in the world and it is still owned by Philip Morris tobacco company. So, ITC strategy might just work in India!   With Cadbury acquisition, Krafts food and Nabisco found a new market for its almost 100-year-old product! In India Oreo will always be known as Cadbury oreo, but you now know its origins! Go and have one, it really is better than the standard cream biscuits we have eaten before.