In a war of words – such as the recent battle between Bennett LeBow’s Brooke Group and RJR Nabisco – the copywriters charged with producing punchy, pithy and persuasive advertising slogans have to first identify, and then encapsulate, the very crux of the argument; that issue which is most likely to determine the outcome.
So did they succeed? Did they isolate those defining issues?LeBow’s first strike on the advertising front came in January. His Brooke Group, the company which owns tobacco company Liggett Group, together with corporate raider Carl Icahn, had launched a consent solicitation for two proposals: the first, non-binding, resolution was for RJR to spin off its food division to shareholders; the second, which was binding, sought to reverse a change made in the company’s bylaws that had increased the number of shareholders required to call a special meeting from 25 per cent to 50 per cent.
LeBow and Icahn had announced their plans at the beginning of November and the consent solicitation officially got under way – after a preliminary scuffle in the courts about LeBow’s true motives, which RJR said were to seek control of the group – at the turn of the year. By then RJR had retained MacKenzie Partners for the solicitation work and advice; DF King for stockwatch sercvices. LeBow hired Georgeson & Co.
On January 22nd Brooke placed his first ad in the Wall Street Journal and the New York Times with the headline: RJR to Shareholders: Drop Dead!
It certainly bore the hallmarks of brevity and clarity; as well as being attention grabbing. The message was that RJR’s senior management was guilty of riding rough-shod over its shareholders’ wishes. Those shareholders, claimed LeBow, wanted the company to realise the value of Nabisco foods – maker of Oreo cookies and Ritz crackers, amongst other things – by spinning it off from its sister tobacco company.
RJR’s line was that it, too, wanted to spin off Nabisco – but not yet. So said Mike Harper, who was the chairman and chief executive officer of the company when this battle first got started last fall. (Harper resigned as CEO shortly afterwards, and has since resigned his chairmanship – both for personal, family reasons.)
In response to LeBow’s announced plan to solicit RJR shareholders’ support for his proposals, Harper said that his board liked the concept but the timing was wrong. In a letter to shareholders he said that a spin-off in the current legal climate would make it ‘virtually certain that the company will be entangled in litigation for years.’
His concern was that an attempt to spin off Nabisco could be challenged in the courts by tobacco claimants arguing that the company was improperly divesting assets.
LeBow saw all this as excuse-making. He countered that litigation was a fact of life for tobacco companies and that even if the massive Castano class action were seen off, there would soon be something else on the horizon. The company, he said, was simply prevaricating and failing to respond to shareholders’ stated wishes.
But according to Stan Kay, senior vice president at MacKenzie Partners, the company’s position on the legal situation was entirely valid. ‘Of course you can argue that there will always be suits against tobacco companies and that’s true,’ he concedes. ‘But there are windows of opportunity in the litigation environment that open and shut. One of the things that would provide a real opening would be the decertifying of the Castano suit. And that’s expected to happen at the end of this year or early in 1997.’ Similarly, if one of the suits by the state attorneys-general seeking contributions to Medicaid costs were to be won by a tobacco company, ‘That would also open the window wider,’ says Kay.
Steven Goldstone, appointed by Harper to succeed him as CEO, reiterated that there was no question of an immediate spin-off in his first letter to shareholders in mid-December. ‘If the litigation environment improves as we expect it will, we believe a more likely time to consider a spin-off would be later in 1997 or 1998,’ he wrote.
This stance was underscored by RJR’s director of corporate communications, Carol Makovich, who made a statement in mid-January, reported by Bloomberg Business News, to the effect that the company would not spin off Nabisco ‘even if as many as 90 per cent of the shareholders favor it.’
Makovich insisted that her comment was consistent with everything the company had been saying all along. But her choice of words gave LeBow the opening for his Drop Dead line and a chance to pursue his self-righteous claim to the role of fairy godmother-in-waiting to RJR’s 450,000 shareholders.
It seems unlikely that many of them fell for that. LeBow’s past is peppered with suspect corporate jiggery-pokery and his self interest in the RJR case was pretty transparent. Throughout the battle, RJR contended that his real goal was to gain control of RJR’s tobacco business and realise a profit by merging it with his own Liggett Group, maker of private-label cigarettes and the fifth largest tobacco company in the US. LeBow had first approached RJR last summer with the suggestion that it might buy Liggett but was turned down.
But however low their esteem for LeBow, RJR’s shareholders were undoubtedly dissatisfied with the company’s lacklustre stock price performance. ‘They understood the reasons for that,’ notes Jason Wright, senior vice president, worldwide corporate communications at RJR. ‘First, Kohl Kravis Roberts had exited the stock dumping 556 mn shares. Second, the company had taken some very necessary but dilutive steps to re-equitise and remove debt – which was painful but it was a sacrifice we had to make if the company was to survive. And thirdly, the tobacco business as a whole had stumbled in early ’95.’
Even if the shareholders did understand these reasons, they still wanted some attention paid to them and LeBow’s consent solicitation gave them the perfect opportunity to demand it. ‘We met with all our major shareholders several times,’ says Wright. ‘And many of them told us that they “wouldn’t have anything to do with that guy,” but that they were going to use the free vote to send us a message.’
And they did just that. The consent solicitation count ended in a degree of disarray, with blizzards on the streets of New York helping to obscure the truth for a few extra days. But when the truth was finally out in the last week of February, 50.38 per cent of shares had been voted in favour of the spin-off; 53.6 per cent in favour of the special meeting proposal.
The vote on the spin-off may not have been binding, but it was still significant. According to Georgeson & Company, LeBow’s proxy solicitor, it was the first time that ‘a Fortune 500 size’ company had ever had a majority of outstanding shares voted against it in a consent solicitation. ‘We cannot find another example,’ says Bill Crane, Georgeson’s CEO. ‘We’ve found some examples of small companies in this situation but not a large one.’
Nevertheless, to no-one’s great surprise RJR said it was still not going to change its plans about the timing of the spin-off. That put the ball back in LeBow’s court. ‘He had said that if shareholders supported the spin-off and RJR’s board agreed to follow their recommendation, then the Brooke Group and LeBow would have gone away,’ says Crane. ‘That was the deal.’
When that didn’t happen, LeBow announced that he would wage a proxy fight for control of the company. He had first named his slate of nine directors back in November. Now he put up Ronald Fulford, who had just resigned as executive chairman of Hanson’s Imperial Tobacco, as CEO- designate of RJR; and added Dale Hanson, ex-CEO of Calpers, to the list of director candidates. His board, of course, was committed to an immediate spin-off of Nabisco. The outcome would not be known until RJR’s annual meeting, which eventually took place on April 17.
In the meantime, RJR’s reaction to the rebels’ initiative confirmed that LeBow’s decision to hang his campaign on the issue of responsiveness to shareholders – encapsulated in his Drop Dead accusation – was the right one. RJR’s response had been that LeBow’s advertisement was an ‘hysterical attempt to misrepresent the company’s position’ and it retaliated with its own ad setting out its true position under the heading: Spin Off Nabisco? You Bet. In slightly smaller letters, it said: But at the right time, when it’s in your interest.
This theme – that shareholders could trust RJR’s board to look after their interests and should mistrust LeBow and his motives – dominated the company’s efforts to secure shareholders’ votes in the ensuing weeks. At the beginning of March RJR’s board offered up its alternative route to increasing shareholder value: a 23 per cent hike in its common share dividend; and a share buy-back programme, authorising the repurchase of around 10 mn shares in the coming years – with $100 mn to be spent this year.
In his letter to shareholders explaining these changes, Goldstone was at pains to display the board’s sensitivity to their needs. He talked of his meetings with them during the consent solicitation: ‘Many told us they took the opportunity to vote … to tell RJR Nabisco in no uncertain terms to take immediate action to improve the performance of their investment, including finding a responsible way to spin off Nabisco as soon as we can.’ He said the raised dividend and buy-back marked ‘an important step in our effort to add value to your investment .. but we want you to know that this is not the last step’; and he described the spin-off as ‘a front-burner issue’.
Goldstone also said a corporate governance and nominating committee was to be created. Comprising outside directors only, its role would be ‘to provide a formal means to determine what additional steps are necessary to complete the company’s transition as well as to step up efforts to recruit additional outstanding outside directors.’
Cynical shareholders may have been more impressed by the offers of cash than by the governance moves, but either way the company was directly addressing their concerns as well as raising the stakes for LeBow. In public, the insurgent was untroubled, writing off RJR’s latest announcement as ‘a ploy to keep the two companies together by simply passing through the Nabisco dividend while ignoring the shareholder mandate for an immediate spin-off.’
But his next move was nothing if not dramatic. Pursuing a high risk strategy that in the end helped ensure he would lose the fight, LeBow announced on March 13 that Brooke Group had agreed to settle with the Castano litigants and would also be settling with five states that had filed for Medicaid reimbursement. The Castano class would receive up to 5 per cent of Liggett’s pre-tax income – capped at $50 mn a year – for the next 25 years. The states would share an initial $5 mn over ten years, as well as a variable percentage of Liggett’s pre-tax income.
The timing of the settlement was no coincidence, since the litigators also agreed not to block a spin-off of Nabisco if LeBow’s slate were elected. ‘LeBow and the Brooke Group regarded this as a one-time opportunity to spin off Nabisco without the risk of litigation to block it,’ says Bill Crane.
So was this an inspired tactic to remove uncertainty – if only on one litigation front – and ensure that LeBow’s desire to spin off Nabisco would not be thwarted by the presence of extant litigation? Or was it sheer madness to open a chink in the tobacco industry’s hitherto united armour, effectively (although not expressly) admitting liability for the first time?
Wall Street had no doubt about the answer, moving swiftly to mark tobacco stocks down – mirroring the reaction in the London market which, unlike New York, was open when the news first broke.
RJR had no doubt, either. Its next advertisement (March 15) took a two-pronged approach, trumpeting its latest moves and reinforcing doubts in shareholders’ minds about LeBow’s suitability as custodian of their interests. RJR Nabisco: Working for all shareholders … responsibly it read.
Apart from spelling out the details of its new financial policy, the ad talked of LeBow and Icahn’s records as raiders, ‘..enriching themselves and leaving other shareholders out in the cold..’ Referring to the settlement, it said: ‘Just this week, LeBow demonstrated his reckless disregard for the long-term interests of RJR Nabisco shareholders …By placing his own agenda above all others, he managed to wipe out – in a single day – $5 bn of stock market value’ from RJR and other tobacco stocks.
LeBow’s response was to try to direct the argument away from his own personality and back to the issue of the spin-off. It’s Now or Never for Nabisco, his next ad proclaimed. But RJR was equally determined to keep the focus on the man and his record, with specific reference to the settlement question. RJR Nabisco Shareholders: Look What Bennett Lebow Has Done for You Lately, was its next message. The ad noted that between the settlement the previous Tuesday and the Friday of the same week, some $7 bn had been wiped off the value of tobacco stocks; and it went on to quote half a dozen analysts commenting negatively on LeBow’s self-interested approach.
For RJR, LeBow’s personality now became its main target. Throughout, LeBow tried to draw attention to the experienced nature of his proposed team, but RJR persisted in throwing the spotlight on him. LeBow … LeBankrupt, it mocked in an advertisement published on 27 March, detailing the failure of two of his companies, New Valley Corporation and MAI, which both filed for Chapter 11 bankruptcy.
Next came LeBow… LeBogus a few days later, in which RJR again presented third party quotes, this time mostly from lawyers criticising his settlement strategy and making comments like: ‘It’s going to get a lot more lawyers interested in going after tobacco companies.’
This was all good knockabout stuff which doubtless amused readers of the Journal and the Times. But the advertisements were also getting to the nub of the issues on which the outcome of the vote would finally depend. They clearly weren’t addressing the detail, but perhaps the detail mattered less than the big questions: Was it wise to spin off the food interests in such an uncertain legal climate? Was a spin-off the only way for RJR to return value to shareholders? Was LeBow a safe pair of hands?
The answers, in RJR’s view, were clearly No, No and No. More importantly, as April 17 drew nearer, it was clear that more and more of its shareholders agreed. Both sides were still busily meeting with those shareholders but while RJR was gaining ground – able to argue that LeBow was bad for the tobacco industry in general, given the impact of his settlement, and would be bad for RJR in particular – LeBow seemed to be facing an increasingly impossible task.
LeBow’s side claimed that it was being blamed unfairly for the decline in tobacco prices, saying that part of the cause was the FDA’s release in the middle of March of statements by three whistleblowers, former employees of Philip Morris, who said that the industry had deliberately sought to manipulate nicotine levels to foster addiction. This story grabbed the front pages and undoubtedly gave the tobacco sector an additional downward shove; and coming so soon after the settlement, it was easy for the two issues to become merged in the minds of disgruntled RJR shareholders as they watched the value of their shares slide. Worse still for LeBow, Philip Morris took the unusual step of publicly supporting RJR against him.
So was this last turn of events poetic justice or a gift from the gods for RJR? ‘We weren’t lucky,’ insists Jason Wright. ‘We were right. We said all along that there were consequences to having a raider like LeBow poking around the company. He’s a dangerous man.’
Dangerous but also defeated, for now at least. Come April 16, LeBow backed off the public humiliation he would have faced if he’d attended RJR’s annual meeting in Winston-Salem, North Carolina, home town of RJ Reynolds. He opted instead to call a press conference in New York at which he formally conceded the contest. He did not withdraw his slate, however, and as we go to press the final vote count is still awaited. But RJR was undoubtedly the resounding victor – perhaps by three to one. ‘And without the votes of Brooke Group, Icahn and Michael Price, it might be as high as ten to one,’ suggests Dan Burch, president of MacKenzie Partners.
So, LeBow. LeBeaten, a final ad might have said. Or LeBow Bowed. But what will he do now? ‘I know what I’d like him to do,’ answers Wright, leaving a dramatic pause. ‘He ought to figure out a way to make his own company work.’
