* KFN shareholders to get 0.51 KKR shares for each of their
* KFN valued at 35 percent premium to Monday's end of
* To boost KKR's book value by 13 percent from $10.07 to
$11.34 per adjusted unit
By Greg Roumeliotis
NEW YORK, Dec 16 KKR & Co LP said it
would acquire its specialty finance company KKR Financial
Holdings LLC (KFN) in a $2.6 billion deal, paid for with
KKR shares trading at an all-time high, that will boost the
private equity firm's dividends.
Launched by KKR in 2004 to invest primarily in a variety of
corporate loan and bond instruments, KFN now has a market value
of $1.9 billion, a fraction of KKR's $17.7 billion market
By taking over KFN, however, KKR expects to generate
additional earnings by substituting fee revenue it receives for
managing KFN on behalf of KFN shareholders with investment
income to be generated by what it will now be its own assets.
It plans to distribute 100 percent of the investment income
it receives from KFN to KKR shareholders. Using a consensus
estimate of Wall Street analysts, KKR's total dividend is
expected to be 7 percent higher in 2014 as a result.
The transaction has echoes of KKR's merger with KKR Private
Equity Investors LP in 2009, a heavily undervalued
Amsterdam-listed private equity fund, which led to KKR becoming
public and having a much bigger balance sheet than its peers.
While KFN was not as discounted as KPE, it traded at 0.9
times its book value despite its 9.2 percent dividend yield. Its
shares are down 9.8 percent year-to-date versus a 64 percent
year-to-date rise in the shares of KKR. KKR's offer, which has
been approved by the boards of both entities, values KFN at 1.15
times book value.
Unlike KKR's private equity division that buys and sells
companies, KFN is managed by KKR's credit investment arm that
manages assets such as collateralized debt obligations and
"Through this transaction, we are acquiring a business with
a fully invested, complementary portfolio of assets while
increasing the scale and diversity of KKR's balance sheet,"
KKR's co-founders and co-chief executives Henry Kravis and
George Roberts said in a statement.
KKR had $90.2 billion in assets as of the end of September
while KFN's portfolio totaled just $2.9 billion. Yet the impact
of the deal on KKR's balance sheet will be substantial, diluting
its exposure to private equity from 68 percent to 44 percent.
KKR said the transaction would immediately add to its
earnings in addition to boosting its balance sheet, giving it
more capital to expand its investment platform further and
invest in its funds. KKR's book value per adjusted unit will
grow by 13 percent from $10.07 to $11.34, the New York-based
KKR offered to pay KFN shareholders with 0.51 newly issued
KKR shares for each of their KFN shares, equivalent to a 35
percent premium based on Monday's closing prices. The deal is
subject to a vote by KFN shareholders and would lead to them
owning 13 percent of KKR.
KFN assets are already managed by KKR staff and so the two
firms said there was very little integration risk involved. KKR
said it expected the deal with KFN to be completed in the first
half of 2014.
Goldman Sachs & Co and Simpson Thacher & Bartlett LLP
are advising KKR, while Lazard Ltd and Cravath Swaine &
Moore LLP are serving as advisors to the independent directors
of KKR's board. Sandler O'Neill + Partners LP and Wachtell,
Lipton, Rosen & Katz are serving as advisors to the independent
committee of the KFN board of directors.