| NEW YORK
NEW YORK Kohlberg Kravis Roberts & Co's KKR.UL plan to merge with a struggling affiliate and then list on the New York Stock Exchange will help the giant buyout firm expand at an ideal time for making acquisitions, KKR executives said on Monday.
KKR, one of the world's most powerful private equity firms, on Sunday announced plans to brave the turbulent equity markets and list on the NYSE this year in a deal that a source familiar with the situation has said would value it at $12 billion to $15 billion.
KKR is aiming to go public through a complicated transaction that involves buying KKR Private Equity Partners KKR.AS, its publicly listed Amsterdam investment fund, delisting it from Amsterdam and relisting the new company in New York.
The move comes amid a drought for the private equity industry's traditional business of leveraged buyouts.
The mega-buyouts of the past few years dried up abruptly last summer when the credit crunch shut off the cheap financing that fed the multibillion dollar deals.
On Monday, KKR co-founder George Roberts cited several factors for the timing of the deal.
He said KKR was disappointed with KPE's stock price and decided to unlock shareholder value through this deal.
He 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 on a conference call. "A leading alternative manager like KKR is poised to benefit from these trends."
Many analysts said the timing of the deal implies that the market is yet to bottom out.
"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."
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.
That range is based on a multiple of 10 to 12 times KKR's run-rate economic net income -- which excludes any benefit of incremental capital raised or invested -- and assumes a return on invested capital of 17.5 percent.
"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.
FIXED INCOME, CAPITAL MARKETS
"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," co-founder Henry Kravis said on the call.
Kravis also said the deal showed KKR's underlying confidence in the U.S. economy, adding that 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," Kravis said on the 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 also stressed that the firm had generated gross annual returns of 26 percent throughout its history, outperforming public markets in every environment.
Executives said the company is also building a capital markets business that generates fee revenues and is "highly scalable."
Through this business, KKR is "able to capitalize on the current instability in financial markets by sourcing capital for nontraditional sources, KKR Partner Scott Nuttall said on the call.
KPE investors, Roberts said, will 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). Roberts said he was proud of KKR's portfolio, and said many of the companies had a defensive outlook.
KKR said the two underperformers in its KPE business were ProSiebenSat.1 Media PSMG_p.DE and NXP, its semiconductor business in the Netherlands. KKR said it wrote down the value of its holdings in ProSiebenSat.1 significantly in the period to June 30.
A joint venture with NXP is expected to close momentarily, perhaps next week, but KKR still has "a lot of work to still do in NXP," Nuttall said.
On the positive side, he said the investment in TXU Energy which closed in November was doing extremely well.
(Additional reporting by Joseph Giannone and Paritosh Bansal; editing by Phil Berlowitz)