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Philip Morris Companies and Kraft, Inc.
Stock Prices and Daily Returns
Philip Morris Kraft S&P 500
Price Return Price Return Price Return
10/3/1988 $97.00 $60.00 638.71
10/4/1988 $98.00 1.03% $58.50 -2.53% 637.01 -0.27%
10/5/1988 $97.38 -0.64% $59.38 1.48% 640.02 0.47%
10/6/1988 $96.88 -0.51% $59.38 0.00% 641.36 0.21%
10/7/1988 $100.88 4.05% $60.63 2.08% 654.83 2.08%
10/10/1988 $101.13 0.25% $60.75 0.21% 655.32 0.07%
10/11/1988 $100.75 -0.37% $60.38 -0.62% 654.68 -0.10%
10/12/1988 $98.88 -1.88% $59.50 -1.46% 645.47 -1.42%
10/13/1988 $99.25 0.38% $59.25 -0.42% 648.48 0.47%
10/14/1988 $98.63 -0.63% $59.50 0.42% 649.23 0.12%
10/17/1988 $100.00 1.38% $60.13 1.04% 651.46 0.34%
10/18/1988 $95.50 -4.60% $88.25 38.37% 658.56 1.08%
10/19/1988 $94.00 -1.58% $90.38 2.38% 652.97 -0.85%
10/20/1988 $99.00 5.18% $90.25 -0.14% 666.99 2.12%
10/21/1988 $97.38 -1.66% $92.00 1.92% 668.92 0.29%
10/24/1988 $97.50 0.13% $102.00 10.32% 665.76 -0.47%
10/25/1988 $95.88 -1.68% $99.00 -2.99% 666.09 0.05%
10/26/1988 $95.50 -0.39% $97.50 -1.53% 663.82 -0.34%
10/27/1988 $95.50 0.00% $94.50 -3.13% 654.24 -1.45%
10/28/1988 $94.75 -0.79% $96.50 2.09% 657.28 0.46%
10/3 - 10/28:
Mean -0.12% 2.50% 0.15%
Std 2.12% 9.17% 0.94%
Annual Volatility 34% 145% 15%
10/3 - 10/17:
Mean 0.30% 0.02% 0.20%
Std 1.61% 1.37% 0.86%
Annual Volatility 26% 22% 14%
Abnormal Returns:
10/18: -5.56% 37.57%
t-statistic: -3.45 27.38
10/20: 3.31% -0.14%
t-statistic: 2.06 -0.10
cdd4e2cc-2945-4179-8cb7-992ceb6cb98c.xls
$110.00
RJR Nabisco
announces
$100.00 management-led
LBO proposal
$90.00
Kraft proposes
leveraged
Philip Morris restructuring it
$80.00
Kraft values at $110;
KKR bids for
RJR Nabisco
$70.00
$60.00
Philip Morris
announces
$50.00 $90 bid for
Kraft
$40.00
$30.00
$20.00
Page 2
Comparison of Philip Morris' bid and
Kraft's leveraged restructuring
counter proposal
Kraft shares (millions):
Outstanding 119.29
Employee Options 2.40
Total 121.68
Philip Morris' Bid
Prevailing
To shareholders $ millions per share market price
Cash payment $10,951 $90 $60.13 Bid represents a
50% premium
over prevailing
Financing $ millions
market price, for
Philip's free CF $1,500
a total premium
Bank credit line $9,451 value of about
Total $10,951 $7,317
Kraft's Leveraged Restructing Proposal
Prevailing
To shareholders $ millions per share market price
Cash dividend $10,221 $84
Cram-down debt $1,704 $14
Stub equity $1,460 $12
Total value $13,385 $110 $92.00
Financing $ millions rate Bid valued by
Existing debt $904 8.65% Kraft at 20%
New bank debt (plug) $6,317 12% premium over
Junk bonds $3,000 13.63% prevailing
market price, for
Subtotal $10,221
a total premium
Cram-down $1,704 15.25%
value of about
Total debt $11,925
Stub equity $1,460
Total financing $13,385 $11,195
Kraft, Inc. Restructuring Proposal Valuation (Ref Case Exhibit 12)
Unlevered cost of equity 12.84%
Tax Rate 34%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Sales $6,515 $6,804 $7,125 $7,481 $7,855 $8,248 $8,660 $9,093 $9,548 $10,025
EBIT $1,280 $1,487 $1,671 $1,755 $1,842 $1,935 $2,031 $2,133 $2,239 $2,351
EBIAT $845 $981 $1,103 $1,158 $1,216 $1,277 $1,340 $1,408 $1,478 $1,552
Change in NFA+NOA ($528) ($387) ($399) ($327) ($381) $94 $104 $113 $123 $113
Asset sales $2,146 $0 $0 $0 $0 $0 $0 $0 $0 $0
Cash flow to capital $3,519 $1,368 $1,502 $1,485 $1,597 $1,183 $1,236 $1,295 $1,354 $1,438
Present value $3,118 $1,075 $1,046 $916 $873 $573 $531 $493 $457 $430
Total PV of cash flows $9,510
Interest (from below) $1,573 $1,321 $1,312 $1,295 $1,296 $1,287 $1,250 $1,204 $1,148 $1,077
Net income ($193) $109 $237 $303 $361 $428 $515 $613 $720 $841
Cash avail for debt svc (Ex. 12)$2,481 $496 $636 $630 $742 $334 $411 $500 $597 $728
Existing debt 8.65%
Beginning principal $904 $793 $760 $703 $416 $316 $216 $116 $16 $0
Interest $78 $69 $66 $61 $36 $27 $19 $10 $1 $0
Interest tax shield $27 $23 $22 $21 $12 $9 $6 $3 $0 $0
Present value $24 $20 $17 $15 $8 $6 $4 $2 $0 $0
Principal pmt (per Ex 12) $111 $33 $57 $287 $100 $100 $100 $100 $16 $0
Total PV of ITS $96
Bank debt 12%
Beginning principal $6,800 $4,430 $3,967 $3,388 $3,045 $2,403 $2,169 $1,858 $1,458 $877
Interest $816 $532 $476 $407 $365 $288 $260 $223 $175 $105
Interest tax shield $277 $181 $162 $138 $124 $98 $89 $76 $59 $36
Present value $248 $144 $115 $88 $70 $50 $40 $31 $21 $12
Principal pmt $2,370 $463 $579 $343 $642 $234 $311 $400 $581 $728
Total PV of ITS $819
Junk bonds 13.63%
Principal $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000
Interest $409 $409 $409 $409 $409 $409 $409 $409 $409 $409
Interest tax shield $139 $139 $139 $139 $139 $139 $139 $139 $139 $139
Present value $122 $108 $95 $83 $73 $65 $57 $50 $44 $39
Total PV of ITS $736
Cram-down debt 15.25%
Beginning principal $1,704 $1,974 $2,286 $2,648 $3,067 $3,553 $3,553 $3,553 $3,553 $3,553
Interest (credit) $270 $312 $362 $419 $486 $562 $0 $0 $0 $0
Interest (cash) $0 $0 $0 $0 $0 $0 $562 $562 $562 $562
Total interest $270 $312 $362 $419 $486 $562 $562 $562 $562 $562
Interest tax shield $92 $106 $123 $143 $165 $191 $191 $191 $191 $191
Present value $80 $80 $80 $81 $81 $82 $71 $61 $53 $46
Total PV of ITS $715
PV of free cash flow $9,510
PV of financing benefits (ITS) $2,365
PVofTerminal (perp) $3,347
Total value of firm $15,223
Less Par Value of Debt $12,408
Value of Equity $2,815
Per Share $23.14
Value of Interest Tax Shield on $12 Billion Incremental Borrowing by
Philip Morris
Tax rate 34%
Interest Rate 12%
Annual Payment to Amortize in 8 years $2,415.63
1989 1990 1991 1992
Beginning Balance $12,000 $11,024 $9,932 $8,708
Principal Repayment $976 $1,093 $1,224 $1,371
Interest $1,440 $1,323 $1,192 $1,045
Interest tax shield $490 $450 $405 $355
Present value $437.14 $358.57 $288.42 $225.79
1993 1994 1995 1996
Beginning Balance $7,337 $5,802 $4,083 $2,157
Principal Repayment $1,535 $1,719 $1,926 $2,157
Interest $880 $696 $490 $259
Interest tax shield $299 $237 $167 $88
Present value $169.86 $119.93 $75.35 $35.54
Total PV $1,309.92
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