Wednesday, July 7, 2010

The Obligatory KKR Goes Public Blog Post

K.K.R. Going Public Next Week

July 7, 2010, 1:50 am

Henry R. Kravis, the dealmaker who symbolized the merger mania of the 1980s and became one of the most powerful figures on Wall Street, is cashing in, The New York Times’s Nelson D. Schwartz and Julie Creswell report.

Mr. Kravis’s firm, Kohlberg Kravis Roberts & Company, is set to go public next week, capping a three-year effort that was thwarted by the financial crisis and the market downturn.

Mr. Kravis will control a 13 percent stake of the new company, contributing roughly $800 million to a fortune estimated to be more than $4.2 billion.

The offering, on the New York Stock Exchange, underscores Wall Street’s remarkable comeback since the depths of the financial crisis in 2008. It also brings new prominence for Mr. Kravis, who first won fame with his daring leveraged buyout of RJR Nabisco in a 1988, a deal that in many ways defined the era.

He has since become a prominent figure in New York’s social and philanthropic scenes, endowing a wing at the Metropolitan Museum of Art, The Times writes.

Last year, Mr. Kravis earned $22 million from K.K.R., as did his cousin, George R. Roberts, a co-founder of the firm.

Like Mr. Kravis, Mr. Roberts will own 13 percent of the new firm, giving their stakes a combined value of $1.6 billion, based on the valuation of Kohlberg Kravis Roberts shares that now trade in Europe.

The third partner, Jerome Kohlberg, left the firm in 1987.

Over the years, K.K.R. swallowed the likes of Toys “R” Us, the Texas utility TXU, and HCA, the health care chain. Now, it will command a market value of roughly $6 billion.

If the offering is successful, the value accorded to Mr. Kravis’s stake in the firm will top the $684 million windfall earned by Stephen A. Schwarzman, whose private equity giant, the Blackstone Group, went public in June 2007.

By going public, K.K.R. has a valuable currency it can use to lure talent and make acquisitions, while also enabling the firm to expand into areas like asset management, as Blackstone has done. It also will make Mr. Kravis’s fortune more liquid, allowing him to eventually sell his shares and diversify his portfolio.

But while Mr. Schwarzman’s timing was nearly perfect — the first ripples of the credit crisis came shortly after Blackstone’s offering — Mr. Kravis had to settle for a listing of a European branch of his firm on the Euronext exchange last fall. In this deal, the K.K.R. units that trade in Europe will effectively be switched to the Big Board.

While still in their 20s, Mr. Kravis and Mr. Roberts joined Bear Stearns, where they met Mr. Kohlberg. The three men pioneered the strategy of using a company’s own balance sheet to help support the debt necessary to buy it, which came to be known as a leveraged buyout.

Leveraged buyouts have been controversial, especially since layoffs and other cost-cutting frequently followed the buyout. Nevertheless, they emerged as one of the most profitable transactions on Wall Street.

Founded in 1976, K.K.R. now has nearly $55 billion in assets and more than 600 employees. It has also had its ups and downs as a private company. After the huge deals of the 1990s, it struggled as holdings like Regal Cinemas went bankrupt. It later bounced back, buying TXU for $45 billion.

But TXU is now groaning under its debt, echoing the larger challenge facing K.K.R. Like other private equity firms, K.K.R. has wrestled in recent years with companies it acquired using large amounts of borrowed money. Still, it managed to earn more than $849 million last year, a reversal from a loss of $1.2 billion in 2008.

Its reach extends around the globe, with 42 percent of its investments in Europe, while 47 percent are in the United States and 10 percent are in Asia.

K.K.R.’s holdings are similarly diversified; its portfolio includes energy, health care, manufacturing, retail.

The offering discloses new details about Mr. Kravis’s fortune, which has only been speculated about, since K.K.R. is a private firm. He will now lose that anonymity, with details like his use of company limousines — $98,771 worth last year, according to the offering statement — will be available to the public. Mr. Roberts, 66, meanwhile, spent $158,413 for his car and driver.

Besides the donations to the Metropolitan Museum, Mr. Kravis, 66, and his wife, Marie-Josée, gave $15 million to establish the Center for Cardiovascular Health at Mt. Sinai Hospital, and $10 million to Columbia Business School in 2006. He also founded the Henry Kravis Leadership Institute at his alma mater, Claremont McKenna College, in Claremont, Calif.

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