That's A Reach, Sir James

By Janice Castro

British investors have long resisted highly leveraged buyouts, looking at them as a woolly American phenomenon -- interesting at a distance but unacceptable at close range. Last week Sir James Goldsmith forced them to take another look by launching a surprise $21 billion hostile bid for B.A.T Industries (1988 revenues: $29 billion). Backed by investors Kerry Packer, the Australian industrialist, and Jacob Rothschild, the British financier, Goldsmith plans to break up the sprawling London-based conglomerate and "liberate" far-flung divisions that sell everything from cigarettes (Kool, Viceroy) to insurance in more than 40 countries.

Even in a European marketplace aswarm with mergers and takeovers in anticipation of the lowering of national barriers in 1992, the B.A.T deal would be worth two-thirds the total value of the 898 European mergers and acquisitions carried out in the first half of this year. It would rank second only to last year's $25 billion takeover of RJR Nabisco by the LBO firm Kohlberg Kravis Roberts.

To pull off the deal, Goldsmith and his partners propose to borrow nearly $17 billion. Drexel Burnham Lambert will raise $6.4 billion through a junk- bond issue, and Bankers Trust will assemble a consortium of banks to provide the rest. Yet B.A.T investors would get no cash for their 1.5 billion shares. Instead, Goldsmith and his partners, bidding through a company called Hoylake Investments, would pay B.A.T shareholders a combination of Hoylake stock and loan chits worth $13.82 a share (B.A.T stock was trading at 11.28 in London before the deal was announced). Hoylake would pay down the debts by selling off B.A.T's retailing and finance holdings.

Co-founded in 1902 by North Carolina tobacco mogul James Duke, the company, formerly known as British American Tobacco, has diversified in much the same pattern as have R.J. Reynolds and Philip Morris. As growth in cigarette sales softened, B.A.T branched into retailing during the 1970s, taking over such chains as Saks Fifth Avenue and Marshall Field in the U.S. and Jewellers Guild shops in Britain. The company capped a move into finance last December with the $5 billion takeover of Los Angeles-based Farmers Insurance.

B.A.T immediately slapped down last week's bid. Chairman Patrick Sheehy described the offer as "no more than an ill-conceived attempt at destructive financial engineering," designed to give the raiders a quick payout by stripping the company's assets. London investors questioned the feasibility of Goldsmith's financing, while corporate chieftains feared he might set off a rash of leveraged takeover raids.

Goldsmith maintains that B.A.T shareholders would be better off if the company were to refocus on the high-profit tobacco business, which is experiencing new growth in Asia and other overseas markets. A veteran conglomerate-buster who served as the model for the swashbuckling Sir Larry Wildman in the 1987 film Wall Street, the 6-ft. 4-in. Goldsmith may have made his point all too well. Now that he has put B.A.T on the block, other raiders may try to top his offer. Or B.A.T may attempt to boost its stock price beyond his reach by launching a restructuring in which some of the company's juicy parts would be sold off. At week's end B.A.T shares closed at 14.21, indicating that investors expect an even sweeter offer to come.

With reporting by Michael Brunton/London