KKR Keeps IPO Plans On Hold For Now

With the IPO market still sputtering, iconic buyout firm Kohlberg Kravis Roberts & Co. is opting to keep its plans to go public on the backburner. Revamping a deal originally announced last summer, the firm said on June 24 it now plans to merge with its Amsterdam-listed fund, KKR Private Equity Investors LP, or KPE.

The maneuvering will give KKR a European listing for the time being, while still holding the door open for an eventual move to the New York Stock Exchange. The original transaction called for KKR to delist KPE from the Euronext Amsterdam exchange and then bring the combined company to the Big Board. Under the revised deal, KKR has up until a year after closing to seek a listing on the New York Stock Exchange. If the year passes without KKR making that move, KPE has the right to cause the combined company to seek the listing.

Although KKR formally withdrew its original IPO plans in conjunction with the revised agreement, the firm remains very eager to pursue a public listing, a source close to the company told Reuters. The earliest it could seek an IPO in New York would likely be spring 2010, the source added.

The other big change in the revised agreement is that it gives KPE ownership of 30 percent of the merged business, up from the 21 percent stake previously provided.

“I view this as an in-between step,” Michael Kim, an analyst at Sandler O’Neill & Partners, told Reuters. Kim still thinks the ultimate goal for KKR remains an IPO.

In addition, a source told International Financing Review, which is published by Thomson Reuters along with Buyouts, that the revised deal would likely result in a smoother move to the New York Stock Exchange once the firm took that step.

“The two-step process would have taken longer,” a source close to the situation told IFR. “The extra step is not necessary – the KKR partners aren’t looking to liquidate right away. The point is to allow investors to look at the whole company.”

The revised deal still has to be approved by KPE’s shareholders. KKR said it has already secured support from institutional investors holding about 44 percent of outstanding shares. Investors backing the deal include Black River Asset Management LLC, a unit of Cargill Inc.; New York-based secondary firm Lexington Partners; Putnam Investments; RS Investments, a San Francisco-based asset manager; and Templeton Global Advisors Ltd., which is part of San Mateo, Calif.-headquartered Franklin Resources.

While the ownership for KPE increases to 30 percent, a previous offer of an additional 6 percent of equity for KPE shareholders if shares trade below a certain threshold is no longer included. The agreement also states that 40 percent of the carried interest earned by the combined business is expected to be allocated to KKR executives.

The saga of KKR’s IPO is enjoying its two-year anniversary this month. The firm first unveiled plans to make the move in July 2007, roughly a month after fellow mega-firm The Blackstone Group made its debut. Back then, KKR sought to sell a total of $1.25 billion worth of common units in a traditional offering on the New York Stock Exchange. At that time, it said it would use the net proceeds from the sale to grow its business, make additional capital commitments to its funds and portfolio companies, and for general corporate purposes. But shortly after the IPO filing, the financial markets took a turn for the worse and momentum for the listing lost steam.

At least some of KKR’s reticence has to be related to the fortunes of Blackstone, which was the first major U.S. private equity firm to go public. Its stock debuted on the New York Stock Exchange at $31 in June 2007 but the shares have suffered along with the rest of the public markets in the grips of the recession. In February of this year, the stock fell below $4. It’s rallied strongly since then, however, managing to move back above $10 in the past two months.

As for dry powder, KKR’s last mega-fund targeting North America was KKR 2006 Fund LP, a $17.6 billion behemoth that wrapped in March 2008. Media reports in November 2008 said the firm would target between $8 billion and $10 billion for its next general buyout fund in 2009 but the firm declined comment at that time and has yet to officially launch such an effort. Its most recent vehicles targeting Asia and Europe raised $3.9 billion and $9.4 billion, respectively, according to Thomson Reuters data.

KKR now expects to kick off the consent solicitation to approve the revised KPE offer later this month after a short cooling-off period in the wake of the news. The firm has set the deadline for completion at October 31. KPE’s independent board of directors, which is being advised by Citigroup, has acknowledged receipt of the offer. KKR itself is being advised on the merger by Morgan Stanley and Goldman Sachs.