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KKR, formerly known as Kohlberg Kravis Roberts, plans to convert to a public company by the end of the year in a transaction that may give it a market value of as much as $15 billion (R114.6 billion).

July 29, 2008

By Jason Kelly and Elizabeth Hester

New York – KKR, formerly known as Kohlberg Kravis Roberts, plans to convert to a public company by the end of the year in a transaction that may give it a market value of as much as $15 billion (R114.6 billion).

KKR, the leveraged buyout firm run by Henry Kravis and George Roberts, abandoned the share sale it proposed more than a year ago, before the buyout market collapsed and initial public offerings (IPOs) dried up. Instead, it will issue new stock to acquire its Amsterdam-listed buyout fund, KKR Private Equity Investors.

Investors who bought shares in its May 2006 IPO have been left with losses of almost 59 percent.

KKR plans to complete the transaction by December and trade the shares on the New York Stock Exchange.

Kravis and Roberts will not raise new capital in the deal, a goal of the original IPO, though they will get the buyout fund’s $4.56 billion of assets and can issue more new stock to make acquisitions and attract and retain employees.

“We’re not cashing out or selling any equity as part of this transaction,” said Kravis. “This is different from any other alternative asset IPO. We’re long-term investors.”

The cousins, who started the firm in 1976, consider public ownership as key to efforts to expand KKR’s fixed-income and capital markets units and reduce their reliance on leveraged buyouts.

For investors, such IPOs present rare opportunities to get in on the booming private equity industry – which buys struggling companies, turns them around and cashes in by taking them public again or selling them to other firms.

“Having a public security is sufficiently attractive that a firm will do a complex deal like this [in] order to have it,” said Colin Blaydon, a director of the Centre for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in New Hampshire.

After the acquisition, shareholders of KKR Private Equity Investors will own 21 percent of the public KKR. The firm will keep 79 percent, and principals, including Kravis and Roberts, whose stock will vest over six to eight years, will not be able to start selling shares for 180 days.

The takeover valued each share of KKR Private Equity Investors at $16 to $19.20, less than the fund’s $22.25 net asset value at the end of last month, the firm said in a presentation.

The stock rose 32.38 percent to close at $13.90 in Amsterdam yesterday. The shares, which were first sold to the public for $25, had dropped as low as $10.30 on July 18.

In all, KKR owns stakes in 46 companies with $205 billion in sales and 855 000 employees. The firm’s investments range from Alliance Boots, the British chain of drugstores, to HCA, the US hospital operator.

Other companies include the former TXU, the Dallas-based power producer it bought with TPG for $45 billion including debt, the largest US leveraged buyout.

In a leveraged buyout, the purchaser borrows money against the target company to fund the transaction. A two-year boom, fuelled by low interest rates that allowed firms to seek ever larger acquisitions, ended a year ago when rising losses on subprime mortgages scared investors away from all but the safest government debt, making financing scarce.

KKR forecasts a profit of about $1.2 billion next year, according to the presentation.

It expects investors to value the company at between $12 billion and $15 billion.

At $15 billion, KKR Private Equity would have a value of about $3.9 billion, according to the presentation.

After earning $814.8 million last year, KKR had a net loss of $117.9 million in the first quarter as the value of the companies it owns fell.

Announced private equity deals dropped by more than 70 percent to $163.1 billion in the year to last Friday from the same period last year, data compiled by Bloomberg shows.

“You can’t get bank debt right now, and KKR or any other private equity firm can’t get the returns they’re looking for without bank debt,” said Dan Veru, at Palisade Capital. “They require more equity investment than leverage.”

KKR managed $60.8 billion of assets at the end of last month. Its funds have returned an average of 26 percent to investors. – Bloomberg