KKR Finds LBO Boom Salvation in U.K. Sale to Walgreen

Henry Kravis
Henry R. Kravis, founding partner of Kohlberg Kravis Roberts & Co. speaks during a session on day three of the World Economic Forum in Davos, Switzerland in 2009. Photographer: Adrian Moser/Bloomberg News

KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, is poised to salvage a winning investment from last decade’s leveraged-buyout boom.

Walgreen Co. agreed today to buy 45 percent of Alliance Boots GmbH for $6.7 billion, valuing KKR’s stake in the company at more than twice its original equity investment. KKR bought a third of Alliance Boots, the largest drugstore chain in the U.K., in 2007. Walgreen has the option to buy the rest of company within three years.

KKR was the most active buyer during the LBO frenzy from 2005 to 2007, announcing deals valued at $220 billion, including three of the 10 biggest transactions, according to data compiled by Bloomberg. The New York-based firm, Alliance Boots Chairman Stefano Pessina and other investors agreed to acquire the company for 11.1 billion pounds ($22.2 billion) in April 2007, the biggest European LBO on record.

“With the benefit of hindsight, we paid a big price for Alliance, but we genuinely believed in the potential of the business,” Dominic Murphy, a KKR partner, said in a telephone interview today. “When we were raising equity for the deal, I told investors there was the IPO exit route obviously, but I said we could also do a strategic deal. It was there in the beginning.”

The buyout market froze within months of the Alliance transaction. In July 2007, Deutsche Bank AG, JPMorgan Chase & Co. and six other banks that had promised to finance the acquisition had to pull plans to sell the debt to investors. Losses on U.S. subprime home loans had climbed and investor confidence in corporate debt was deteriorating, triggering a global credit crisis.

Shopping Spree

KKR has a long history of buying retail and consumer companies. In 2006 and 2007, the firm snapped up Toys “R” Us and Dollar General Corp. for $7.5 billion and $7.3 billion, respectively. KKR’s plan to sell Toys “R” Us through an initial public offering has languished amid uncertain capital markets. The toy store chain filed for an IPO in May 2010.

KKR took Dollar General public on the New York Stock Exchange in 2009, selling shares in the Goodlettesville, Tennessee-based discount retailer for $21 apiece. Shares held by KKR and its co-investors were valued at $8.76 in the original transaction. KKR has steadily sold down its interest through secondary offerings as Dollar General stock has gained. The shares closed today at $52.20.

Walgreen, based in Deerfield, Illinois, has an option to buy the remaining 55 percent of Zug, Switzerland-based Alliance Boots during the six months beginning 2 1/2 years from when the deal closes, the companies said today in a statement.

Cash Back

In the 2007 takeover, KKR funds paid about 1.22 billion pounds in cash, along with some debt, to acquire a third of Alliance Boots’ shares, KKR said. Walgreen said today it will pay 1.2 billion pounds to KKR and 7 million shares of Walgreen common valued at 140 million pounds.

While KKR is getting most of its original investment back, the rest of its return depends on whether Walgreen decides to exercise its option. At the current share price, the return would be 2.7 times KKR’s investment in pounds, and 2.2 times in dollars, Murphy said.

Early Success

KKR saw early success in Europe. Its first dedicated European fund, started in 1999, is valued at almost three times its original cost, according to KKR’s most recent quarterly earnings report. Its second fund, from 2005, is valued just below cost. The most recent fund, started in 2008, is valued slightly above cost, according to the report.

Through its history, including transactions prior to having dedicated European funds, KKR has delivered returns of about 3.3 times invested capital on deals in the region, according to an investor presentation obtained by Bloomberg News.

The firm and its investors made 4.1 times their money on Legrand SA, the world’s largest maker of wiring devices, and a

3.3 multiple on cash register maker Wincor Nixdorf AG, according to the presentation.

Some European takeovers by KKR have struggled. The firm values its investment in phone-book publisher PagesJaunes Groupe SA at zero and its stake in broadcaster ProSiebenSat.1 Media AG at less than 50 percent of the cost.

Private-equity firms pool money from pensions, endowments and sovereign wealth funds and pair it with debt to fund takeovers. They typically own companies for about five years before selling them through public offerings or to larger companies in order to reap profits to distribute to their original investors.

Raising Capital

Those sales, or exits, are critical in persuading investors to commit money to subsequent funds. KKR is raising its 11th North American buyout fund, with a target of about $10 billion.

The Alliance Boots deal with Walgreen was 18 months in the making, KKR’s Murphy said. Alliance Boots’ Pessina said in an interview earlier this year that he was in search of a “transformational” merger rather than an IPO.

“Generating liquidity on the largest-ever European private-equity transaction at a time of significant economic disruption is a tremendous achievement by KKR,” said James Pitt, a partner at Lexington Partners, which invested alongside KKR in Alliance Boots.

(Corrects value relative to cost of KKR’s most recent European fund in 11th paragraph of story published yesterday.)
Before it's here, it's on the Bloomberg Terminal. LEARN MORE