Kohlberg Kravis Roberts and Co. (KKR)has been been stalking larger prey of late. It’s also been spending money like crazy. But despite being involved in 11 deals so far this year, the buyout giant still hasn’t depleted the war chest it raised last year. That’s because Henry Kravis’s firm generally brings partners into its deals. There’s nothing new about that. But KKR has cleverly found ways to avoid sharing control with private-equity rivals.
KKR is in the process of finalizing deals with a total value, including debt, of more than $110 billion (Rs4.51 lakh crore). If it employed the typical 80% leverage, these buyouts would require an equity injection somewhat larger than even KKR could afford. That’s why it needs partners. So-called “club deals” are common. But they generally involve teaming with other buyout firms. That’s not always popular. Besides the clashing of egos, club deals make it more difficult to effect change after the LBO (leveraged buyout).
In recent deals, KKR has found a variety of partners. It’s teaming up with TPG and two Wall Street banks in its $45billion bid for Texas utility TXU. But the other transactions are less conventional. For the $24 billion takeover of Alliance Boots, KKR is partnering with the UK drug store’s largest shareholder. It has also persuaded banks to provide cash in the form of an “equity bridge”, which the banks later pass on to institutional investors. Equity bridges are being used in the TXU deal and are likely to feature in KKR’s $29 billion purchase of First Data.
KKR is tapping shareholders to fund the $8 billion bid for the US hi-fi maker Harman International, announced this week. Harman shareholders are getting the chance to convert their holdings into an equity stake of up to 27% in the LBO. Then, there are hedge funds. Steve Cohen’s SAC Capital has signed up with KKR on the $3.8 billion buyout of US university group Laureate Education. The private-equity firm is also involved in talks with Canadian telecom giant BCE. In this case, KKR is working with three local pension funds and is keen to bring in three more.
Add these contributions up, plus a few smaller deals, and it looks like KKR is set to commit roughly $13 billion of equity, leaving plenty of spare change from the $21 billion it raised last year. By looking for new partners, KKR makes its money go further. More importantly, by eschewing club deals, KKR has a free hand to impose its own will after the buyout.