KKR looks for breathing room with IPO

Kohlberg Kravis Roberts & Co.’s plan to become publicly traded by acquiring its struggling European affiliate signals that the buyout boom may flounder longer and force the private equity firm to focus on other businesses.

On July 27, KKR unveiled its plans to acquire KKR Private Equity Partners, its publicly listed Amsterdam investment fund, and relist the new company in New York. The move comes as the private equity industry faces a drought of deal-making after last year’s credit crunch shut off the cheap financing that fueled multi-billion dollar takeovers.

“The timing of the IPO suggests that KKR is not expecting a significant recovery in the buyout market any time soon,” said Isabel Schauerte, an analyst with Celent, a Boston-based financial research and consulting firm. “Otherwise, the company would have been willing to wait until the market picks up in order to get a better valuation,” Schauerte added.

Deal-making by financial sponsors plunged 77% in the first half of the year to $124 billion, down from $527.7 billion in the first half of 2007, according to research firm Dealogic.

For its part, KKR said the combined company would benefit from KKR’s push into new business opportunities such as fixed income, infrastructure and real estate. “The fixed income business should be a growth engine for us going forward,” KKR co-founder Henry Kravis said on a conference call.

“We believe there is a significant opportunity to leverage our intellectual capital and long-standing relationships with our investor base to drive this business over several quarters,” Kravis said. KKR also believes a public listing will allow it to have a more permanent capital base and to use stock to retain and attract staff and make acquisitions.

Kravis defended the timing of the transaction, saying it showed the firms’ underlying confidence in the U.S. economy. “The fact that we are taking this step now when the market conditions are weak and the value of all companies are down, shows our commitment to the long future of building KKR,” Kravis said.

KKR said the value of the combined company would range between $15 billion and $19 billion, representing a 52% to 82% premium to KPE’s closing stock price of $10.50 on July 25. KPE made its debut on the public markets in May 2006 in a $5 billion, or $25 a share, offering. “The structuring of the IPO indicates that KKR is not seeking to raise capital,” said Celent’s Schauerte. “Rather, the deal allows for a buyout of KKR Private Equity at a discounted rate.”

KKR co-founder George Roberts said the firm had been disappointed with KPE’s stock price and saw a way to unlock shareholder value with this deal. He added that the company had “tremendous confidence” in its portfolio of companies and believed that owning a bigger portion of those companies would provide “significant growth opportunities” in the future. “Today, many institutional investors are turning to alternate investments to balance their portfolio,” Roberts said. “A leading alternative manager like KKR is poised to benefit from these trends.”

Roberts said KPE investors would also benefit from holding shares in a bigger, more diverse company. KKR has investments in numerous household names such as Toys R Us, mattress maker Sealy, and asset manager Legg Mason.

Still, KKR said it had no plans for a similar transaction for its KKR Financial Holdings LLC affiliate, which has seen its stock drop 27% this year. KKR Financial invests in corporate loans and debt, asset-backed securities and equity securities. In March, KKR Financial said it would complete its exit from mortgage-related businesses.

Story by Reuters. Additional reporting by Joseph Giannone and Paritosh Bansal in New York and Jessica Hall in Philadelphia