KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, agreed to buy the publicly traded credit business KKR Financial Holdings LLC in a $2.6 billion transaction.
Investors will receive 0.51 KKR shares for each share of KKR Financial, valuing the public fund at $12.79 a share, a 35 percent premium to its latest closing price, New York-based KKR said in a statement yesterday. The transaction is subject to a vote by shareholders of KKR Financial, which is known commonly as KFN, and is expected to be completed in the second quarter of 2014.
KFN has fallen 10 percent this year as investors expressed disappointment in its strategy, according to Scott Valentin, an analyst at FBR Capital Markets & Co. William Sonneborn stepped down in July as KFN’s chief executive officer and was replaced by Craig Farr. KFN said it would simplify its business by reducing investments in natural resources, commercial real estate, private equity and mezzanine financing, Valentin wrote in a Dec. 5 note. Remaining strategies include collateralized loan obligations, opportunistic credit and specialty lending.
“We’ve been looking for more ways to increase cash flow and distribution per unit,” Scott Nuttall, KKR’s head of global capital and asset management, said on a conference call with investors yesterday. “These are assets that we know and like. We’ve underwritten all of them.”
KKR formed KKR Financial in 2004 as a mortgage real estate investment trust and sold its shares to the public the following June, raising more than $800 million. In 2008, the fund was forced to halt its dividend for one quarter after the value of mortgage holdings plummeted. Saturnino Fanlo, then KFN’s CEO, and chief operating officer David Netjes both resigned as Kravis and Roberts hired Sonneborn from TCW Group Inc.
KFN reached a high of $29.55 in February 2007 before sliding to as low as 42 cents as markets bottomed in March 2009. The stock has since climbed more than 20-fold to yesterday’s close of $9.45.
Sonneborn stepped down to pursue a new challenge, KKR said in July. The stock has underperformed broader markets this year as KFN tried adjusting its strategy to add more certainty to its cash flows, according to Valentin. KFN had strong earnings last year because of payoffs from high-yield debt it bought during the financial crisis, and it was forced to invest those proceeds at lower yields in 2013, Valentin said in a telephone interview.
“It makes so much sense that I recommended this two years ago,” Leon Cooperman, whose Omega Advisors Inc. owns shares of KFN and KKR, said on the conference call yesterday. “The price is fair. We’re already a KKR shareholder and we look forward to owning more of KKR.”
Omega is the second-biggest investor in KFN, with a 7.4 percent holding, according to data compiled by Bloomberg. Other large shareholders include FMR LLC, Thornburg Investment Management Inc. and Royal Bank of Canada, the data show.
KKR has merged with a publicly listed fund before. In 2008 the firm agreed to combine with a European listed fund, KKR Private Equity Investors LP, after shares of the buyout fund fell. By moving the listing to the New York Stock Exchange, KKR’s shares began trading publicly in the U.S. in 2010, joining peers Blackstone Group LP and Fortress Investment Group LLC.
Merging with KFN will add $2.9 billion in assets to KKR, bringing the book value of the firm’s balance sheet to about $9.3 billion, according to the statement. KKR’s balance sheet is highly liquid and the firm expects to reinvest its capital in higher-returning investment strategies, chief financial officer Bill Janetschek said on yesterday’s call.
KKR was advised by Goldman Sachs Group Inc. and Simpson Thacher & Bartlett LLP, and the firm’s independent directors were advised by Lazard and Cravath Swaine & Moore LLP, according to the statement. Sandler O’Neill & Partners LP and Wachtell Lipton Rosen & Katz advised KFN.