NEW YORK Kohlberg Kravis Roberts & Co's KKR.UL 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.
KKR plans to acquire KKR Private Equity Partners KKR.AS, 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 as last year's credit crunch shut off the cheap financing that fueled multibillion 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 said.
Dealmaking by financial sponsors plunged 77 percent in the first half of the year to $124.0 billion, down from $527.7 billion in the first half of 2007, according to research firm Dealogic.
PUSH INTO NEW OPPORTUNITIES
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 out intellectual capital and long-standing relationships with our investor base to drive this business over several quarters," Kravis said.
KKR said a public listing would 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.
BUYING A STRUGGLING AFFILIATE
KKR said the value of the combined company would range between $15 billion and $19 billion, representing a 52 percent to 82 percent premium to KPE's closing stock price of $10.50 on Friday. KPE made its debut on the public markets in May 2006 in a $5 billion, or $25 a share, offering.
Shares of KPE surged more than 32 percent to close at $13.90.
"The structuring of the IPO indicates that KKR is not seeking to raise capital. Rather, the deal allows for a buyout of KKR Private Equity at a discounted rate," Schauerte said.
KKR co-founder George Roberts said the firm had been disappointed with KPE's stock price and decided to unlock shareholder value through this deal.
"We believe the valuation range is fair, given that it values KKR ahead of less diversified peers, including Och Ziff (OZM.N) and Apollo Management, but below the current 13 times forward multiple for Blackstone Group (BX.N)," Sandler O'Neill analyst Michael Kim said.
Roberts also said KKR had "tremendous confidence" in its portfolio of companies and believed that owning a bigger portion of those companies at this time provided "significant growth opportunities to KKR and KPE unit holders in the coming years.
"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."
Still, KKR said it had no plans for a similar transaction for its KKR Financial Holdings LLC KFN.N affiliate, which has seen its stock drop 27 percent 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.
Roberts said KPE investors would 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 ZZ.N, and asset manager Legg Mason (LM.N).
"Previously as essentially a fund-of-funds vehicle, KPE primarily invested in KKR's private equity business," said Sandler O'Neill's Kim.
"Following the deal, KKR shareholders own a much more diversified asset management business including building fixed income, capital markets, infrastructure, real estate, and mezzanine platforms," Kim said.