CARL C. ICAHN
April 23, 1999
Fellow Shareholders:
A black cloud of tobacco litigation hangs over our company. The S&P 500 has
skyrocketed 220% since 1991, but our share price has fallen by over 50% in the
same period.
On March 9th, management announced a long-awaited plan to improve the terrible
performance of RJRN's stock. The plan includes selling the international tobacco
business, which we strongly favor, and spinning off the domestic tobacco
business, which we strongly oppose. Today, RJRN's stock is actually selling
BELOW the market price before that announcement. I view this as the market's
harsh verdict on management's plan to spin off domestic tobacco. I think the
market is absolutely right. There are far too many problems with management's
spinoff plan for it to improve shareholder value. Our plan to spin off Nabisco
is far superior.
HERE IS WHY MANAGEMENT'S PROPOSAL WILL NOT WORK:
RJRN TODAY MANAGEMENT'S PLAN ICAHN'S PLAN
- ----------------- ------------------------- ----------------------------------
[Litigation [Litigation [Litigation [Litigation
Cloud Cloud Cloud Cloud
Graphic] Graphic] Graphic] Graphic]
RJRN HOLDINGS RJRN HOLDINGS TOBACCO RJR HOLDINGS NABISCO
| | | | $28 per share to
NABISCO TOBACCO NABISCO TOBACCO RJRN shareholders,
free of litigation
cloud
Estimated at
$14 per share(1) + $28 per share(2)
Market Price: Market Price: ? Estimated Market Price:
about $26 Market today is aware $14 + $28 + $42 per share
that separation is about
to take place, but RJRN
stock still trades at
about $26
Mr. Goldstone plans to spin off the domestic tobacco business not Nabisco. In my
view, that plan will do nothing to add value, because Nabisco's inherent value
will continue to be diminished by the dark clouds of litigation which hang over
RJR Holdings.
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(1) Estimated at $14 per share by RJRN's own financial adviser, Salomon Smith
Barney, in a report dated
April 12, 1999.
(2) Market capitalization per RJRN share based on Nabisco's recent market price.
Indeed, it seems likely that for the foreseeable future, tobacco - and RJR
Holdings - will continue to be threatened by the gale winds of litigation, as
exemplified by:
o The possibility of class action and other third party
lawsuits still exists. Even though tobacco has recently
thwarted the attempt of plaintiffs to bring class actions, a
decision on the Engle case in Florida is nearing. I believe
that, if the tobacco industry loses the Engle case, the
specter of class action and third-party litigation will
likely continue to have a profoundly chilling effect on the
price of the Nabisco holding company, if the spinoff is done
the Goldstone way.
o The possibility of the Justice Department's bringing a suit against
tobacco also looms large. If the suit is commenced, it seems likely to
negatively impact the price of the Nabisco holding company, if the
spinoff is done the Goldstone way.
o We have been seeing punitive damages awarded to individual tobacco
plaintiffs. Over the next several years many more such cases are likely
to be brought, and a number may be won. When this happens, the Nabisco
holding company's stock will be buffeted, if the spinoff is done the
Goldstone way.
In all of these cases, however, if the Nabisco holding company were spun off as
a tax-free dividend, as I propose, then, in my view, its market price should not
be adversely affected.
In my view, the reason that, under the Goldstone plan, the Nabisco holding
company's stock will be severely affected by these litigation problems is
obvious: with each lost case or threatening event, buyers of Nabisco will fear,
rightly or wrongly, that the tobacco company might go bankrupt, and that
litigants will break through the corporate veil of the holding company and claim
the Nabisco stock - the same fear they have today.
I do not believe RJR will ever become insolvent.(3) However, perception is what
shapes valuation, and the perception of possible bankruptcy of the tobacco
company will, in my view, plague the Nabisco holding company stock for years to
come. Under the Goldstone plan, that perception could continue to adversely
affect market value. But if Nabisco is spun off cleanly, as I propose, it will
be in the hands of thousands of shareholders and out from under the cloud of
litigation. To put it simply, it is infinitely better for shareholders if
Nabisco is spun off cleanly. The Goldstone plan cannot and will not do that.
THE SIMPLE MATH BEHIND MY PROPOSAL
My proposal is straightforward: spin off Nabisco - not the
tobacco business - to RJRN shareholders:
o This would free Nabisco ENTIRELY from RJR and the specter of tobacco
litigation.
- -------------------
(3) In a 150 page report recently prepared by Stroock & Stroock & Lavan,
economic studies were done that show there is very little likelihood that
insolvency would occur because RJR has extremely flexible pricing ability.
2
- Leading tobacco industry analyst Gary Black has said
that my proposal would remove the risk of liability
from the Nabisco shares.
o I believe my proposal to spin off Nabisco will provide us all
a one-time opportunity to realize a substantial increase in
the value of our investment in RJRN. RJRN shareholders would
receive a tax-free dividend of Nabisco stock which comes to
approximately $28 per RJRN share, based on Nabisco's recent
market price of $42 and RJRN's share of Nabisco's market
capitalization.
o This analysis does not even consider any possible market
premium for a free-standing Nabisco which would not be
dominated by an 80.5 % stock ownership like RJR Nabisco.
Today, ALL OF RJRN sells for approximately $26 per share.
o Shareholders would continue to own the tobacco company, which
is currently generating cash flow of well over $1 billion per
year, and in my opinion could continue to pay a dividend of
approximately $1.60 per share. This stock should therefore
have some value on its own, despite the problems facing the
tobacco business, on top of the value per share of Nabisco.
- RJRN'S OWN FINANCIAL ADVISOR, Salomon Smith Barney,
believes that tobacco, on its own, is worth a minimum
of $14 per share. Assuming Nabisco is $28 per RJRN
share and tobacco is $14 per RJRN share, the two
would be $42. Even though the Goldstone plan was
announced weeks ago, the price today of RJRN stock is
only about $26. While there are no assurances that
these assumed values will be the actual values, the
comparison is obvious: $26 PER SHARE THE GOLDSTONE
WAY, VERSUS $42 PER SHARE THE ICAHN WAY.
- It is important to emphasize that if the spinoff is
done the Goldstone way, Nabisco will remain under the
cloud of tobacco litigation. For that reason and
others, now may be the only time to spin off Nabisco.
SELF-PROTECTION VS. FIDUCIARY RESPONSIBILITY
Shareholders have over the past several years advocated that management spin off
Nabisco. Indeed, two years ago, shareholders with 51% of the votes consented to
a precatory resolution advising the RJRN Board to spin off Nabisco. The Board
simply did nothing about it. That Board, by the way, is essentially the same
Board that has presided over RJRN for the past five years.
Why does RJRN refuse to pursue my simple plan, which I believe can generate
value vastly superior to what the market sees in Mr. Goldstone's proposal? I
believe the real reason is fear. It could be that the Board is afraid future
tobacco claimants may hold them personally liable. I believe the refusal to
propose the Nabisco spinoff means that management and the
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(4) The New York Times, March 12, 1999. Statement by Gary Black used with his
permission.
3
directors are sacrificing shareholder value in order to protect themselves from
perceived personal liability. In contrast, if elected, my Nominees are committed
to acting on behalf of all shareholders and are prepared to take decisive action
to fulfill their fiduciary responsibilities.
THE SPINOFF WOULD NOT BE ENJOINED
Management of RJRN raises the specter of legal impediments that prevent the
spinoff of Nabisco. However, I am convinced that a spinoff is legal and would
not be enjoined. In fact, I have been advised by attorneys that there is no
legal obstacle to the spinoff of Nabisco. Stroock & Stroock & Lavan, a firm
nationally recognized for its substantial expertise on product liability and
fraudulent conveyance, has concluded, based upon its lengthy and heavily
researched report, that a spinoff of Nabisco would not be enjoined by a court
because there would be no merit to any argument for such an injunction.(5) The
report shows that even if a number of cases are lost in the future, there is
little chance that RJR tobacco would become insolvent. Even if plaintiffs could
show a judge that there is a likely possibility of insolvency, plaintiffs would
also have to prove several other facts (see attached conclusion of the Stroock
report).
Perhaps more importantly, even if a plaintiff could find a judge willing to
grant an injunction, it seems unlikely to me that any single plaintiff would be
willing to post the huge bond that I think would be necessary to obtain the
injunction. Nor do I believe any plaintiff would be willing to face the risk of
being sued for huge damages by RJRN, if, at a later date, it was shown that an
injunction had been obtained wrongfully.
WHY NOT TRY?
In my opinion, there is no argument against my proposal that can hold a drop of
water. And whatever contention might be raised still leaves one critical
question: why not TRY to spin off Nabisco? I believe that there is nothing to
lose by trying. As the largest shareholder in the company, I believe that we
must pursue that option, and that there is little risk in doing so. In the
extremely unlikely event that the spinoff of Nabisco did not work, there is no
reason management's plan couldn't be implemented at that point.
But we CANNOT pursue my proposal later. If Mr. Goldstone charges ahead and spins
off the domestic tobacco business, it will virtually eliminate RJRN's ability to
spin off Nabisco in the near future to unlock Nabisco's true value. So, it's now
or never.
YOUR SUPPORT IS ESSENTIAL
If ever there was a time to align the will of shareholders with the actions of
management, it is now. But present management needs to hear what we, the owners
of RJRN, think the future of the company should be. Management has avoided
spinning off Nabisco, offering what I consider to be only the vaguest of excuses
for its lack of action. The current directors are unwilling to
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(5) Stroock's report was filed with the SEC by my affiliate High River Limited
Partnership. The report is available on EDGAR and should be read in its
entirety.
4
execute a spinoff of Nabisco. Based upon the facts known today and upon the
Stroock report, my Nominees are prepared to spin off Nabisco promptly upon
taking office. Indeed, Stroock has informed me that they will furnish the RJRN
Board, upon request, a legal opinion, based on its report and its assumptions,
that a Nabisco spinoff does not constitute a fraudulent conveyance.
As the largest single shareholder in the Company, I clearly have a great deal at
stake. All shareholders have a stake in which plan is adopted. As stated above,
I believe the value of our holdings will increase under my plan, when Nabisco's
value and the underlying value of the domestic tobacco business are considered
together.
I also intend to ask the Nominees upon their election to adopt a by-law
provision which will prevent the Board of RJRN from instituting a poison pill
without a stockholders' vote.
Together, we can capture the true value of our investment. By voting for my
slate at the Annual Meeting on May 12th, you are in a position to make a
momentous decision. The destiny of the company is in our hands. I think it is
obvious that what is at stake is a one-time opportunity to increase the value of
the investment all of us have in RJRN.
Remember:
1. The Goldstone plan fails to maximize shareholder value because it will
not dispel the cloud of litigation over the company's key asset,
Nabisco.
2. The value of my proposal is clear: $28 per share for Nabisco alone,
plus tobacco, estimated by Salomon Smith Barney at $14 per share = $42
PER SHARE VERSUS ABOUT $26 PER SHARE FOR RJRN TODAY.
3. My Nominees are prepared to effect the Nabisco spinoff promptly after
they are elected.
4. A spinoff would not be enjoined, as the Stroock report demonstrates.
5. There is nothing to lose by trying a Nabisco spinoff. But it's now or
never.
Sincerely,
/s/ Carl C. Icahn
Carl C. Icahn
SUPPORT MY NOMINEES - PLEASE SIGN, DATE AND RETURN THE GOLD PROXY, WHICH IS
ENCLOSED WITH MY PROXY STATEMENT, IN THE POSTAGE- PAID ENVELOPE. EVEN IF YOU
HAVE ALREADY RETURNED THE RJR PROXY, YOU CAN CHANGE YOUR VOTE. REMEMBER, ONLY
YOUR LATEST-DATED PROXY COUNTS.
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APPENDIX
Following is the "Conclusion of Executive Summary" from a 150-page report,
prepared by Stroock & Stroock & Lavan and used with their permission, entitled
"The Nabisco Spinoff: Civil Liability and the Tobacco Industry."
CONCLUSION OF EXECUTIVE SUMMARY
In order to grant an injunction, a plaintiff would have to demonstrate
to a judge that there would be "irreparable harm" to the plaintiff if Nabisco
were spun off. In other words, the plaintiff would have to prove that Holdings
would be rendered insolvent. We conclude in this report that even if over the
next 25 years the claims brought by the federal government, third-party health
care payors and the asbestos companies succeed at the high end of our estimates,
there would still be over $200 billion in profit to satisfy individual claims.
Thus, we believe that no reasonable case can be made for insolvency and,
therefore, the "irreparable harm" allegation fails. But even if the Tobacco
Plaintiffs could convince a court that Reynolds is today insolvent by reason of
tobacco liabilities, they must still prove a fraudulent conveyance. Spinning
off Nabisco would not constitute a fraudulent conveyance because (1) Holdings
is not liable as a tobacco tortfeasor for tobacco-related claims: (2) there is
no basis to pierce the corporate veil between Reynolds and Holdings; and (3)
Reynolds was not insolvent in the past when it upstreamed capital. Based upon
this analysis, we conclude that an injunction would not be granted.