April 2 (Bloomberg) -- Kohlberg Kravis Roberts & Co. agreed to buy First Data Corp., the world's largest processor of credit-card payments, for about $25.6 billion in the second- biggest leveraged buyout ever.

KKR will pay $34 a share in cash for First Data, 26 percent more than the March 30 closing price, the companies said today in a statement. It would be the largest LBO after the $31.8 billion takeover of Dallas-based utility TXU Corp. proposed in February by KKR and TPG Inc., formerly Texas Pacific Group.

Henry Kravis and George Roberts, New York-based KKR's co- founders, have unveiled plans for $100 billion in purchases in the past six months, almost one-fifth of all LBOs disclosed in the period. First Data Chief Executive Officer Henry ``Ric'' Duques put the Greenwood Village, Colorado-based company up for sale seven months after spinning off its Western Union money- transfer unit and as he struggled to increase earnings.

``The company could be a higher-margin business and they're buying at a time when it's low-margin,'' said Wayne Johnson, an analyst with Raymond James & Associates in Atlanta who rates First Data's shares ``market perform. ``Three to five years is a pretty good time frame to monetize this investment.''

Shares of First Data rose $5.55, or 21 percent, to $32.45 at 4 p.m. in New York Stock Exchange composite trading. They had gained 9 percent since March 19, and the company's credit- default swaps had advanced almost 60 percent, amid speculation the company was a takeover candidate.

`Go Shop'

KKR will pay 27 times First Data's estimated 2007 earnings per share, Tien-tsin Huang, a JPMorgan Chase & Co. analyst in New York, said today in a note to investors. The average for the payment-processing group is 22 time earnings.

Roger Smith, an analyst at New York-based Fox-Pitt Kelton, told clients in a note that he didn't expect to see ``significant additional bidders'' because of the high valuation.

First Data's deal with KKR includes a provision under which its board will actively solicit other offers for 50 days, the companies said in the statement. This kind of ``go-shop'' clause is being used increasingly to deflect shareholder criticism that companies are agreeing to buyouts without holding auctions to get the highest price.

KKR probably was attracted by First Data's stable cash flow and its 49 percent stake in Chase Paymentech, a joint venture with JPMorgan that processes transactions for stores, analysts said.

KKR's Buying Spree

``It's a free-cash flow machine,'' said Craig Peckham, an analyst with Jefferies & Co. in New York who rates First Data shares ``buy'' and doesn't own them. ``That has a lot of appeal to a private-equity investor.''

The company's gross margin, a measure of profitability, narrowed to 32 percent last year from 48 percent in 2002, Bloomberg data show. First Data may accelerate investments in new technology programs to widen those margins, Raymond James's Johnson said.

Today's deal follows KKR's takeover bids for retailer Dollar General Corp. and Laureate Education Inc., a provider of campus- and Internet-based college programs. KKR and billionaire Stefano Pessina last week increased their bid for Alliance Boots Plc, the largest U.K. drugstore chain, to 10.1 billion pounds ($19.9 billion).

LBOs Get Bigger

Private-equity firms typically borrow two-thirds to three- quarters of the purchase price of a target and finance the rest with cash raised from investors, as well as their own funds. They seek to expand businesses or improve performance before selling them within five years to other funds or to investors in initial public offerings.

The companies valued the First Data deal at $29 billion including the cost of stock options and restricted shares, and assumption of debt. By that measure, it would be the fifth- largest LBO on record, behind KKR's $31.3 billion acquisition of RJR Nabisco Inc. in 1988. First Data has $2.4 billion in outstanding bonds, according to data compiled by Bloomberg.

Buyout-fund managers have benefited as the cost of debt financing fell to the lowest in a decade. They announced a record $188 billion of takeovers in the first quarter, Bloomberg data show. Armed with more than $210 billion of cash raised since the start of 2006, LBO firms now have enough equity capital to make $2 trillion of acquisitions.

In the past two years, they have teamed up to buy even bigger targets including HCA Inc., the largest U.S. hospital operator. That practice has drawn scrutiny by the U.S. Department of Justice, which is investigating whether firms may be unfairly cooperating to set prices for companies.

Debt Rating

Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, HSBC Holdings Plc, Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co. advised KKR and are arranging loans to fund the takeover. Some of the banks will also provide equity-bridge financing, CNBC reported. Morgan Stanley worked with First Data and Evercore Partners advised the group of directors on the company's strategic review committee.

Standard & Poor's affirmed its A rating on First Data's senior unsecured debt, citing the company's plan to buy back its outstanding bonds. S&P cut the corporate debt rating five notches to BB+, or ``junk'' status, saying the company would no longer an investment-grade issuer because of debt that would be used to finance the takeover by KKR.

The perceived risk of owning First Data's debt surged. Credit-default swaps based on $10 million of the company's bonds more than doubled to $217,500 today from $104,500 on March 30, according to prices compiled by CMA Datavision. An increase in the five-year contracts, which are used to speculate on the company's ability to repay its debt, indicates deterioration in the perception of credit quality.

American Express Spinoff

Duques, 63, has been planning to step down and has said that First Data's board would make a decision on his successor between March and August. Duques turned the company over to Charles Fote in 2002, then returned after the stock underperformed market benchmarks and Fote resigned in November 2005.

In his first stint as CEO, Duques oversaw the 1992 spinoff from American Express Co. and increased the company's revenue and market value sevenfold. Last year, Duques spun off Western Union, then First Data's biggest and fastest-growing source of revenue, to focus on handling electronic payments for banks and businesses.

First Data's net income fell 12 percent last year after the spinoff, as net sales climbed to $7.1 billion. Earnings from continuing operations rose 5 percent to $847.7 million.

Duques said Feb. 22 the company would stop handling official checks and money orders, a move he estimated would free up $300 million in cash. He cited ``unacceptable returns'' in that business for the decision.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Justin Baer in New York at jbaer1@bloomberg.net

Last Updated: April 2, 2007 16:06 EDT