Talk to any buyout pro and he’ll tell you that no deal comes easy. Whether it means suffering through a long due diligence process, a vicious auction, repeated negotiations with management or all of the above, there’s no question that completing a leveraged buyout is an accomplishment in and of itself.
Now imagine an acquisition where you have the potential for all those obstacles, plus the following: The target is a defense-related company, located in a country that’s upset with the U.S. over its position in Iraq, and you happen to be a Yankee. Add in that the country’s top official is speaking out against your acquisition, and its legislature is hard at work on a law to make it almost impossible for your deal to close.
That’s exactly what U.S. buyout firm Kohlberg Kravis Roberts & Co. faced in its deal to purchase DaimlerChrysler’s MTU Aero Engines, a EURO1.5 billion transaction that endured both public and federal scrutiny once its interest in the German engine builder was made public last year.
For a while, it seemed that everyone in the German government had something to say about the deal. German Chancellor Gerhard Schroeder initially weighed in, saying, “I was not happy at the time about [the HDW transaction, and] the current situation proves that I was right to be skeptical.”
Also making their voices heard, both the Economy and Labor Minister, Wolfgang Clement, and the Parliamentary State Secretary, Ditmar Staffelt, spoke out against the deal, with Staffelt opining, “It’s too bad that one of the biggest companies in our country (DaimlerChrysler) doesn’t believe it’s capable of continuing to run a high-tech company such as MTU.” And when the public outcry had reached a crescendo, the German government went to work on a new bill aimed at blocking foreign investors from buying more than 25% of a German defense company.
But despite all those obstacles, KKR kept the course, and behind the scenes, was able to work out a deal addressing the interests of everyone involved, including the German government.
“We wanted to make sure we were welcome and not viewed [by the government] as a hostile acquiror,” Johannes Huth, a managing director in KKR’s London office, told Buyouts. “The government had a genuine concern, given the amount of money it spends [on defense], that the business would be acquired and just taken offshore. We were able to address those concerns, and we ensured that the company’s proprietary technology and research efforts would stay in Germany.”
The Yalta Accord
KKR paid EURO1.5 billion for MTU, buying the business in December from DaimlerChrysler, which divested the company as part of its restructuring efforts. The firm financed the transaction with a 60%/40% debt-to-equity ratio, with JPMorgan Chase, Credit Suisse First Boston and Commerzbank all taking part in the debt syndicate. In buying MTU, KKR was able to shake off competitive bids for the unit from European buyout shop Doughty Hanson & Co. and The Carlyle Group, the latter which was looking to acquire the company through its Fiat Avio platform.
“What really sold the deal for us was that we spoke to their customers, competitors and suppliers, and they were universal in talking about the strength of the company and its brand,” Huth said, adding that the business should benefit greatly from DaimlerChrysler’s past investment in the company. “They have invested significantly in new engine programs over the last five years, and we felt that we would be able to benefit from that for years to come.”
To be sure, the aerospace industry has suffered in recent times, with the sector taking a big hit in the wake of September 11 and the SARs outbreak. But KKR believes the space is ready to again take flight. “When we looked at the general cycle in the aerospace industry, we felt that now was a good time to enter,” Huth says.
The company’s exposure to the defense arena has provided stability during the downturn, and its focus on civil aviation should contribute significant upside once travel numbers rebound. “On the defense side, we look at that business as a stable and steady supply of cash flow,” Huth said, adding that “the civil side has obviously suffered, but we believe those events [that led to the downturn] are behind us and the sector is ready to pickup.”
Looking ahead, most speculation points to KKR eventually floating the company in an IPO. Huth would only say, “It’s not imminent, but that’s where we think this business will go.” There has also been conjecture that the likelihood of a public offering made the deal easier to digest for German authorities. However, Huth does not see an IPO in the immediate horizon. “We’re going to grow the business, improve its cash flows, and when the environment starts to pickup, then we can start thinking about something like that.”