Target: Sun Microsystems Inc. (NSDQ: SUNW)
Private Placement Amount: $700 million
Investor: Kohlberg Kravis Roberts & Co.
Terms: $350 million in convertible senior notes due in 2012 at 0.625 percent interest; $350 million in convertible senior notes due 2014 at 0.75 percent interest
Conversion Price: $7.21 per share
Through the firm’s publicly-traded vehicle listed on the Euronext Amsterdam exchange, the New York-based firm spent $700 million via a PIPE (private investment in public equity) deal to acquire low-interest, convertible senior notes in the tech company late last month. It gained a seat on Sun’s board of directors in the process.
“I think this gives KKR a seat at the table without too much risk because they’re covered either way,” Wael Aburida, managing director of technology investment banking at Nollenberger Capital Partners, told Buyouts in a phone interview. If Sun’s stock jumps beyond the $7.21 conversion strike price, then KKR gets a discount on its equity investment. If the firm does not convert the debt to equity, it still gets the interest on the senior notes and the seat on Sun’s board.
But KKR could have further motives. Namely, buying. “It’s a good way for KKR to start evaluating whether it makes sense to take [Sun] private and how to extract value from it,” said Aburida. Santa Clara, Calif.-based Sun has a market cap of about $22.28 billion, putting it within striking range of a number of the larger LBO firms. The bidding war for Equity Office Properties Trust shows that LBO firms are willing to take companies private for a price tag of at least $38 billion.
As a major creditor to Sun, KKR is likely to be privy to confidential information that would be useful in making a future decision about a control stake purchase. Assuming the firm can make the equity conversion, KKR would also be in a good position to influence the board on divestitures of underperforming divisions, or even on a decision to sell the entire company, Aburida said.
KKR’s investment came in two separate tranches, each valued at $350 million. The first set of notes is due in 2012, the other in 2014. The 2012 tranche pays interest at 0.625 percent, and the 2014 tranche pays interest at 0.75 percent. At KKR’s discretion, both sets of senior notes may be converted to equity positions if Sun’s per-share price works its way up to $7.21 or higher. Sun’s shares closed at $5.66 the day before the deal was announced.
Sun CEO Jonathan Schwartz said the company would use the money to “pursue strategic opportunities for growth,” which has as least one analyst questioning why the deal was made at all since Sun already has about $3.9 billion of cash on hand. “Sun doesn’t appear to need the [extra] cash. KKR is not providing cost-cutting advice…[and their] role is unclear unless large leverage is required,” wrote Merrill Lynch analyst Richard Farmer in a note to investors.
Ten years ago, Sun was at the top of its game as a maker of computer servers and processors. But like many of its peers, the company faded with the bursting of the Internet bubble and never fully recovered. As late as July of last year, the company’s stock traded as low as $3.74 per share after trading, down from over $60 per share in 2000. The company faces tough competition from AMD Inc., Dell Inc., Hewlett-Packard Development Co., and Intel Corp.
Shares of Sun, which trade on the Nasdaq under the ticker symbol SUNW, were priced at $6.49 a piece as of press time. KKR’s $700 million investment includes $350 million of financing provided by a major bank to KKR Private Equity Investors, the publicly-traded vehicle in Amsterdam, according to a statement released by Sun.
KKR could not be reached for comment.—A.N.