Kkr Is Seeking Greener Pastures

And Europe--especially Germany--looks particularly lush now

Edward A. Gilhuly is surprisingly soft-spoken, even genteel, for an American buyout specialist. That may be why Kohlberg Kravis Roberts & Co., the U.S. buyout firm, sent him to London at the end of 1998 to head its European operations. Gilhuly, 40, seems just the kind of person to put skeptical corporate chieftains at ease--and everybody else on notice. He's not shy about saying that KKR wants to be a big player in Europe's fast-growing buyout industry. And with 24 years of experience, a new $3 billion Europe fund in hand, and three deals worth about $2.2 billion on the books so far, KKR makes competitors plenty nervous.

KKR, of course, is eager to broaden its range of targets beyond the U.S. More than half of the firm's roughly $6 billion in uncommitted capital is now aimed at Europe. That's because the center of gravity of the buyout industry has shifted across the Atlantic. European private-equity deals came to a record $45 billion in 1999; the U.S. figure was just $32 billion.

RESPECT. Attitudes are changing, too. European industrialists used to consider buyout pros little more than opportunists. But as pressure grows to bust up conglomerates, it is buyout firms that are often the most avid bidders. And young executives seem to respect the KKR brand name in particular.

But replicating its U.S. success won't be easy for KKR. In Europe, it faces at least a dozen U.S. and local rivals with some $30 billion to invest. And some competitors are none too impressed with KKR's recent buys. Says one: "They haven't done a single creative deal so far." KKR is also subject to the usual criticism of Americans: insensitivity to European business culture. In this case, however, seven of Gilhuly's nine-strong team are European.

KKR has had its successes, though. In 1999, it roughly tripled a $166 million investment in a British newspaper business called NewsQuest PLC when it was bought by Gannett U.K. And rivals call KKR's $1.6 billion acquisition in 1998 of Willis Corroon Group, a British insurance broker, a smart buy. Both these deals, though, were handled from the U.S. before Gilhuly's arrival.

Gilhuly is focusing on Germany, which he believes will one day be the hottest buyout zone in Europe, surpassing Britain, which accounted for 59% of the market last year. But KKR is still thin on the ground in Germany compared with such rivals as BC Partners and Schroder Ventures. It lost out to BC Partners on a $1 billion deal for Friedrich Grohe, a family-controlled bathroom-fixtures company, even though KKR's bid was supposedly higher.

"A DOG." Still, Gilhuly has won some business in Germany. In October, KKR and the private-equity wing of Goldman Sachs & Co. paid $720 million for a Siemens unit, renamed Wincor Nixdorf, which produces automated teller machines and cash registers. Gilhuly says he likes its strong growth prospects and management team. However, competitors call the business a "dog" that is too vulnerable to new technology.

KKR also acquired a business phone switches unit from Robert Bosch in January. KKR plans to reshape the unit, which it renamed Tenovis, into a supplier of Internet-related services. Gilhuly justifies paying a fairly stiff price, about $500 million, because Tenovis has nearly 150,000 customers--far more than some European telecoms, such as Jazztel, that have multibillion-dollar market capitalizations. Few others bid for the Bosch unit, but KKR saw the makings of a major New Economy company. "You have to take a creative approach that goes beyond just buying something," Gilhuly says.

In another talked-about deal, KKR is acquiring Wassall PLC, a British mini-conglomerate, for $980 million and taking it private. KKR plans to join Wassall's main asset, Thorn Lighting Group, with Austria's Zumtobel, a family-owned outfit. Bankers appreciate KKR's ability to combine these businesses to create a Europe-wide firm. They also say that KKR is paying a very low price. However, a rival says that "two mediocre businesses don't add up to a good one."

Not usually. But only when KKR sells off these investments five to seven years from now will anybody know for sure whether Gilhuly or his critics are right.