KKR To Buy First Data For 21x Multiple

Target: First Data Corp.

Price: $29 billion, or 21x estimated ’08 EBITDA

Sponsor: Kohlberg Kravis Roberts & Co.

Seller: First Data Corp.

Financial Advisors: Sponsor: Citigroup, Credit Suisse, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch; Seller: Morgan Stanley; Directors’ committee: Evercore Group

Legal Counsel: Sponsor: Simpson Thacher & Bartlett; Seller: Sidley Austin; Directors’ Committee: Sullivan & Cromwell

With its $29 billion offer to take private credit-card processor First Data Corp., Kohlberg Kravis Roberts & Co. might have hit on a winning strategy to soothe shareholder unease: Make an offer they can’t refuse.

KKR’s bid, announced April 2 following approval by First Data’s board of directors, represents a 34 percent premium to the stock’s trading price two weeks before the deal was announced. The offer also values the company at 21x First Data’s estimated 2008 EBITDA, according to Joshua J. Elving, a Piper Jaffray analyst who tracks financial institutions. “The price that KKR is paying is pretty rich,” he said. “It’s at the high end of the reasonable threshold.” In an April 3 research note, AG Edwards analyst Timothy Willi wrote that KKR is paying about 50 percent more than the average EBITDA multiples for all buyouts in the last 12 months.

John Kraft, an industry analyst with D.A. Davidson & Co., puts KKR’s offer at the high end for recently completed deals in financial technology. On an EBITDA-to-takeout-valuation basis, KKR is paying three times more than the The Carlyle Group and Providence Equity Partners paid to delist financial software company Open Solutions in January. At the same time, KKR is offering about 15 percent less than strategic buyer Intuit plunked down for Digital Insight Corp., provider of online banking services, last month, Kraft wrote in an April 5 research note. Through a spokesperson, KKR declined to comment.

Not only will the richness of KKR’s offer likely mollify shareholder concerns of a buyout theft, but it should scare away other LBO firm suitors, even without considering the $700 million breakup fee, according to analysts. The deal agreement gives First Data a 50-day go-shop window to seek a competing offer.

Unlike the mammoth deals announced in the last year, including KKR’s pending offer with TPG for TXU Corp. and its LBO of HCA Inc. last year with Bain Capital, KKR is going it alone with First Data Corp. KKR’s willingness to strike a solo mega-deal—on the heels of the Blackstone Group’s $39 billion independent buyout of Equity Office Properties—goes against the trend of clubby mega-deals. In 2006, more than nine in 10 deals valued at more than $5 billion involved clubs, according to law firm Weil, Gotshal & Manges.

Flying alone, KKR could end up writing one of the biggest equity checks in history for First Data, based in Glenwood Village, Colo., although it’s likely that KKR will seek to syndicate its equity interest. The deal’s structure, including the size of the debt, has not been announced. The company carries about $2.5 billion in debt.

First Data fits the profile of a prime LBO candidate. The company, which processes payments for credit card firms, is a cash machine, having generated $1.2 billion in free cash flow in 2006. Analysts expect that private ownership will allow First Data to invest in an expensive, global platform that will produce big gains when the company is ready for a return to the public market. First Data also recently stripped itself down, spinning off its Western Union division last summer.

“It’s the traditional LBO target,” Piper Jaffray’s Elving said.

A gaggle of investment banks—Citigroup, Credit Suisse, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs & Co. and Merrill Lynch & Co.—are providing credit for the transaction. They also served as financial advisors to KKR on the deal.

Since the start of the year, KKR has vigorously put its $16 billion 2006 Fund to work, launching more than $100 billion worth of deals, including the proposed $6.9 billion take-private of Dollar General Corp. and the $16.9 billion LBO of British pharmacy Alliance Boots Plc. According to Bloomberg, KKR’s activity accounts for one-fifth of all private equity-backed buyouts announced since Jan. 1.—J.H.