signal to the market that it was in play, setting off a stampede of buyers when this suited
Milken's strategy.
The Beatrice LBO illustrates how necessary Milken's role was to the overall strategy of
Bush backer Kravis. Beatrice was the biggest LBO up to the time it was completed in
January-February 1986, with a price tag of $8.2 billion. As part of this deal, Kravis gave
Milken warrants for five million shares of stock in the new Beatrice corporation. These
warrants could be used in the future to buy Beatrice shares at a small fraction of the
market price. One result of this would be a dilution of the equity of the other investors.
Milken kept the warrants for his own account, rather than offer them to his junk bond
buyers in order to get a better price for the Beatrice junk bonds. Later in the same year,
KKR bought out Safeway grocery stores for $4.1 billion, of which a large part came from
Milken.
After 1986, Kravis and Roberts were gripped by financial megalomania. Between 1987
and 1989, they acquired 8 additional companies with an aggregate price tag of $43.9
billion. These new victims included Owens-Illinois glass, Duracell, which may not keep
on running as long as many think, Stop and Shop food markets, and, in the landmark
transaction of the 1980's, RJR Nabisco. RJR Nabisco was the product of a number of
earlier mergers: National Bisucuit Company had merged with Standard Brands to form
Nabisco Brands, and this in turn merged with R.J. Reynolds Tobacco to create RJR
Nabisco. It is important to recall that R.J. Reynolds was the concern traditionally
controlled by the famnily of Bush's personal White House lawyer, C. Boyden "Boy"
Gray.
The battle for control of RJR Nabisco was lost by RJR Nabisco chairman Ross Johnson,
Peter Cohen of Sherason Lehman Hutton and the notorious John Gutfruend of Salomon
Brothers. KKR opposed this group, and a third offer for RJR came from First Boston.
The Johnson offer and the KKR were about the same, but a cover story in the Luce-Skull
and Bones Time Magazine in early December, 1988 targetted Johnson as the greedy
party. The attraction of RJR Nabisco, one of the twenty largest US corporations, was an
immense cash flow supplied especially by its cigarette sales, where profit margins were
enormous. The crucial phases of the fight corresponded with the presidential election of
1988: Bush won the White House, so it was no surprise that Kravis won RJR with a bid
of about $109 per share compared to a stock price of about $55 per share before the
company was put into play, giving the prebuyout shareholders a capital gain of more than
$13.3 billion. How much of that went to Boy Gray of the Bush White House?
The RJR Nabisco swindle generated senior bank debt of about $15 billion. The came $5
billion of subordinate debt, with the largest offering of junk bonds ever made. Then came
an echelon of even more junior debt with payment in securities and junk bonds that payed
interest not in cash, but in other junk bonds. But even with all the wizardry of KKR, there
could have been no deal without Milken and his junk bonds. The banks could not muster
the cash required to complete the financing; KKR required bridge loans. Merrill Lynch
and Drexel were in the running to provide an extra $5 billion of bridge financing. Drexel
got Milken's monsters and many others to buy short-term junk notes with an interest rate