Originally created 03/10/99

RJR Nabisco is getting out of the cigarette business



NEW YORK -- RJR Nabisco Holdings Corp., the food-and-tobacco conglomerate whose brands include Camels and Winstons, Oreo cookies and Ritz crackers, is getting out of the cigarette business.

RJR said Tuesday it will sell its international tobacco business to Japan's biggest tobacco company for $7.8 billion and spin off its domestic tobacco operations as a separate company.

The move comes amid rising legal challenges to cigarettes and falling numbers of U.S. smokers -- something tobacco opponents were quick to note.

"The tobacco industry is in deep trouble," said Ahron Leichtman, executive director of Citizens for a Tobacco-Free Society.

RJR said its aim is merely to help the cigarette and food companies achieve greater success as separate entities.

The $17 billion conglomerate has been under pressure for several years from major stockholders to separate its food and tobacco businesses because the tobacco is considered a drag on RJR's stock. Some investors won't put their money in any company that has tobacco holdings, out of either opposition to smoking or fear that lawsuits will hurt profits.

The breakup doesn't entirely solve the problem, because RJR can be hit with tobacco lawsuits even after it has shed its cigarette business.

Carl Icahn, the corporate raider who holds 7.7 percent of RJR stock, had threatened to launch a fight for control of the board of directors to force a separation. He did not return calls for comment Tuesday.

His 25 million shares grew in value slightly as RJR Nabisco stock rose 12´ cents to $28.75 on the New York Stock Exchange. Nabisco Holdings -- which trades as a separate stock -- closed up 31¨ cents at $44.93Ü.

RJR Nabisco was created during the mid-1980s when the R.J. Reynolds tobacco company bought the food company Nabisco Brands.

RJR's international tobacco business is a distant third to Philip Morris Cos. and British-American Tobacco, and its earnings have fallen amid financial turmoil in its key Russian and Asian markets. It will be sold to the Japan Tobacco Co.

"The deal will allow us to secure a base for future growth overseas and establish us as a global player," Japan Tobacco said in a statement.

After the sale, RJR will spin off its domestic tobacco operations to RJR shareholders. The tobacco business will revert to its old name -- R.J. Reynolds Tobacco Co. -- and retain its headquarters in Winston-Salem, N.C.

The resulting RJR Nabisco will be basically a food company, with such products as Chips Ahoy! and Snackwell's cookies, Life Savers candy and Planters nuts.

"We believe that the food and tobacco businesses will be best able to achieve their full potential under separate ownership structures," said RJR chairman and chief executive Steven F. Goldstone.

If RJR had tried to spin off its food assets instead, it probably would have been accused by anti-tobacco forces of trying to shield assets from tobacco lawsuits. Such accusations could have tied up such a breakup in court.

John Maxwell, an analyst at Davenport & Co., said RJR got a fantastic price for the international business and will use the proceeds to help reduce its $9.1 billion debt.

Even with lower debt, however, the R.J. Reynolds Tobacco Co. faces challenges. Analysts expect the steady decline in smoking will accelerate because of big price increases that are being used to pay for a lawsuit settlement that is costing the industry $246 billion over 25 years.

In addition, the government is considering a similar suit to recover the costs of treating sick smokers. A California jury recently ordered Philip Morris to pay a smoker a record-breaking $51 million. A class-action smokers' suit is on trial in Florida, and several union health funds are suing the industry.