Kohlberg Kravis Roberts & Co (commonly referred to as KKR) is a New York City-based private equity firm that focuses primarily on late-stage leveraged buyouts. It was founded in 1976 by Jerome Kohlberg, Jr., and cousins Henry Kravis and George R. Roberts, all of whom had previously worked together at Bear Stearns.
The KKR approach
KKR specializes in leveraged buyouts (LBO) and suggest that they developed the principle of creating a series of limited partnerships to acquire various corporations which they deemed to be underperforming. In most cases, KKR (often with management) financed up to twenty-five percent of the acquisition price with its own capital and borrowed the remainder through bank loans and by issuing high-yield bonds, while having a more favorable approach towards the latter. KKR would often ensure that the target company's management retained an equity interest to create a personal financial incentive for them to approve of the takeover and work diligently towards the success of the investment.
The bank loans and bonds used to finance the acquisition were collateralized by the tangible and intangible assets of the target company. Because the bondholders only received their interest and principal payments after the banks were repaid, these bonds were deemed riskier than investment grade bonds in the event of default or bankruptcy, and popularly became known as "junk bonds."
Investment banks such as Drexel Burnham Lambert, led by Michael Milken, helped raise money for leveraged buyouts. Once the targeted company was acquired, KKR would help restructure the company, usually selling off certain underperforming assets and implementing a series of cost-cutting measures. The new "leaner and more efficient" company could then be resold, often at significant return on investment.
History
Working for Bear Stearns in the 1960s and 1970s, Jerome Kohlberg, Henry Kravis and George Roberts began a series of what they described as "bootstrap" investments. They targeted family-owned businesses, many of which had been founded in the years following World War II which by the 1960s and 1970s were facing succession issues. Many of these companies lacked a viable or attractive exit for their founders as they were too small to be taken public and the founders were reluctant to sell out to competitors and so a sale to a financial buyer could prove attractive. Their acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions.[1]. In the following years the three Bear Stearns bankers would complete a series of buyouts including Stern Metals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as well as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals. Although they had a number of highly successful investments, the $27 million investment in Cobblers ended in bankruptcy.[2]
By 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation of Kohlberg Kravis Roberts & Co. in that year. Most notably, Bear Stearns executive Cy Lewis had rejected repeated proposals to form a dedicated investment fund within Bear Stearns and Lewis took exception to the amount of time spent on outside activities.[3] Early investors included the Hillman Family[4] By 1978, with the revision of the ERISA regulations, the nascent KKR was successful in raising its first institutional fund with approximately $30 million of investor commitments.[5]
KKR was among the most prolific private equity investors in the 1980s. Among the firm's most notable acquisitions were the following:
- KKR completed the first buyout of a public company by tender offer, by acquiring the food distributor and supermarket operator together with the company's chairman Joseph R. Hyde III.[6]
- KKR completed the first billion-dollar buyout transaction to acquire the leisure-time company with interests in television, movie theaters and tourist attractions. The buyout comprised the acquisition of 100% of the outstanding shares for $842 million and the assumption of $170 million of the company's outstanding debt.[7]
- KKR sponsored the $6.1 billion management buyout of Beatrice, which owned Samsonite and Tropicana among other consumer brands. At the time of its closing in 1985, Beatrice was the largest buyout completed.[8][9]
- KKR completed a friendly $5.5 billion buyout of Safeway to help management avoid hostile overtures from Herbert and Robert Haft of Dart Drug.[10]. Safeway was taken public again in 1990.
- KKR acquired the company for $3.3 billion in early 1988 but faced issues with the buyout almost immediately. Most notably, a subsidiary of Jim Walter Corp (Celotex) faced a large asbestos lawsuit and incurred liabilities that the courts ruled would need to be satisfied by the parent company.[11] In 1989, the holding company that KKR used for the Jim Walter buyout filed for Chapter 11 bankruptcy protection.[12]
RJR Nabisco and the Barbarians at the Gate
After the 1987 resignation of Jerome Kohlberg at age 61 (he later founded his own private equity firm, Kohlberg & Co.), Henry Kravis succeeded him as senior partner. Under Kravis and Roberts, the firm was responsible for the 1988 leveraged buyout of RJR Nabisco. One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of the boom that had begun nearly a decade earlier. In 1989, KKR closed in on a $31.1 billion dollar takeover of RJR Nabisco. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was chronicled in the book, Barbarians at the Gate: The Fall of RJR Nabisco, and later made into a television movie starring James Garner.
F. Ross Johnson was the President and CEO of RJR Nabisco at the time of the leveraged buyout and Henry Kravis was a general partner at KKR. The leveraged buyout was in the amount of $25 billion, and the battle for control took place between October and November 1988. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share marking a dramatic increase from the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and horse-trading ensued which pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many of the major banking players of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers, and Merrill Lynch were actively involved in advising and financing the parties.
After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with Shearson Lehman and Salomon Brothers, submitted a bid of $112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board of directors of RJR Nabisco. KKR's offer was guaranteed, whereas the management offer (backed by Shearson Lehman and Salomon) lacked a "reset", meaning that the final share price might have been lower than their stated $112 per share. Additionally, many in RJR's board of directors had grown concerned at recent disclosures of Ross Johnson' unprecedented golden parachute deal. TIME magazine featured Ross Johnson on the cover of their December 1988 issue along with the headline, "A Game of Greed: This man could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far?".[13] KKR's offer was welcomed by the board, and, to some observers, it appeared that their elevation of the reset issue as a deal-breaker in KKR's favor was little more than an excuse to reject Ross Johnson's higher payout of $112 per share. F. Ross Johnson received $53 million from the buyout.
At $31.1 billion of transaction value (including assumed debt), RJR Nabisco was by far the largest leveraged buyouts in history. In 2006 and 2007, a number of leveraged buyout transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. The deal was first surpassed in July 2006 by the $33 billion buyout of U.S. hospital operator Hospital Corporation of America, in which KKR also participated, though the RJR deal was larger, adjusted for inflation. However, adjusted for inflation, none of the leveraged buyouts of the 2006 – 2007 period would surpass RJR Nabisco. The RJR transaction benefited many of the parties involved. Investment bankers and lawyers who advised KKR walked away with over $1 billion in fees, and Henry Kravis and George Roberts attracted unprecedented amount of publicity that turned the cousins into instant celebrities. Unfortunately for KKR, size would not equate with success as the high purchase price and debt load would burden the performance of the investment. The initial equity injection by KKR was $1.5bn, in July 1990 they were forced to put in an additional $1.7 bn. After over fifteen years of efforts that included taking RJR public, as well as exchanging shares of RJR for the ownership of Borden Foods, formerly chemicals-to-pasta conglomerate, KKR finally exited the investment in 2005, selling the remnants of its stock in Borden's Chemical division to Apollo group at a significant loss.
KKR in the 21st Century
In the recent years, KKR's track record has been mixed. Heavy losses on such investments as Regal Entertainment Group, Spalding, and Primedia were offset by successes in Willis Group, Wise Foods, Inc., Shoppers Drug Mart, Bell Canada Yellow Pages, Wincor Nixdorf, MTU Aero Engines and TXU, among others. KKR opened a successful office in London led by Johannes Huth, but it lost many of its original partners, including Saul Fox, Ted Ammon, Ned Gilhuly, Mike Tokarz and Scott Stuart who were instrumental in establishing KKR's reputation and track record in the 1980s. KKR remains tightly controlled by Kravis and Roberts. The issue of succession will likely continue to leave a large dark cloud over KKR's future.
In 2006, KKR raised a new $17.6 billion fund the KKR 2006 Fund, LP, with which the firm began executing a series of some of the largest buyouts in history. Among the companies acquired by KKR in 2006 and 2007 were the following:
- Kohlberg Kravis Roberts and Bain Capital, together with Merrill Lynch and the Frist family (which had founded the company) completed a $31.6 billion acquisition of the hospital company, 17 years after it was taken private for the first time in a management buyout. At the time of its announcement, the HCA buyout would be the first of several to set new records for the largest buyout, eclipsing the 1989 buyout of RJR Nabisco. It would later be surpassed by the buyouts of Equity Office Properties, TXU and BCE (announced but as of the end of the first quarter of 2008 not yet completed).[14]
- The Danish phone company was acquired by Kohlberg Kravis Roberts, Apax Partners, Providence Equity Partners and Permira for €12.2 billion ($15.3 billion), which at the time made it the second largest European buyout in history.[15][16]
- Kohlberg Kravis Roberts and Stefano Pessina, the company’s deputy chairman and largest shareholder, acquired the UK drug store retailer for £12.4 billion ($24.8 billion) including assumed debt, after increasing their bid more than 40% amidst intense competition from Terra Firma Capital Partners and Wellcome Trust. The buyout came only a year after the merger of Boots Group plc (Boots the Chemist), and Alliance UniChem plc.[17]
- The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs acquired the medical devices company for $11.6 billion.[18]
- Kohlberg Kravis Roberts and TPG Capital completed the $29 billion buyout of the credit and debit card payment processor and former parent of Western Union[19] Michael Capellas, previously the CEO of MCI Communications and Compaq was named CEO of the privately held company.
- An investor group led by KKR and TPG Capital and together with Goldman Sachs completed the $44.37 billion[20] buyout of the regulated utility and power producer. The investor group had to work closely with ERCOT regulators to gain approval of the transaction but had significant experience with the regulators from their earlier buyout of Texas Genco.[21] At the time of its announcement, the buyout of TXU, was the largest buyout in history, although the announced acquisition of BCE would surpass the TXU buyout. As of the end of the first quarter of 2008, the BCE transaction had still not been completed.
Recent activities
- On April 26, 2007, Harman International Industries announced it had entered an agreement to be acquired by KKR. [23] This will place a debt of US-$ 4.7 billion on Harman.[24] For comparison: Sales were $ 3.5 billion, operating margin $ 382 mio. Total assets were $ 2.5 billion in FY 2007. [25]
- On April 2, 2007 it was announced that KKR entered an agreement to acquire First Data(NYSE: FDC), one of the nation’s first and largest credit-card processing companies. [26]
- On March 12, 2007 KKR announced the interest in the Nottingham, UK based retail and chemical company Alliance Boots, owner of Boots, the famous retail store on England's High Street. This interest culminated in an escalated, and unopposed, April 24, 2007 takeover offer for $22.2B.[27] That same March day, KKR announced an effort to take over Dollar General (NYSE: DG), a Tennessee-based operator of variety stores that part of the S&P 500. KKR intends to take the company private.[28] On July 25, it was widely reported that the banks which underwrote to syndicate the debt for this deal have been having difficulty getting buyers.
- In October 2006, KKR bought a 50% stake in Tarkett, a France-based distributor of flooring products, in a deal valued at about €1.4 billion ($1.8 billion).
- In 2005 KKR bought the German company Duales System Deutschland, which has a monopoly on recycling the packaging of consumer goods.
- In 2007, after being hit by the US credit markets chaos, KKR had to postpone a $1.25 billion public offering after investors showed little interest.[35]
- September 2007 Kohlberg Kravis Roberts and Goldman Sachs Group backed out of an $8 billion buyout of upscale audio equipment maker Harman International Industries. By the end of the day on the news, Harman shares had plummeted by more than 24%.
- In September 2007, KKR Financial Holdings, an affiliate, was bailed-out for $270 million by Henry Kravis and George Roberts. On February 20, 2008 it was reportedly once again forced to delay the repayment of billions of dollars of commercial paper, and was beginning a new round of talks with creditors. [36]
Notable current and former employees
In 1987, KKR founder Jerome Kohlberg left KKR to found a new private equity firm Kohlberg & Company.
As of 1996, general partners of KKR (as opposed to associates) included Henry Kravis, George R. Roberts, Paul E. Raether, Robert I. MacDonnell, Jose Gandarillas, Michael W. Michelson, Saul A. Fox, James H. Greene, Jr., Michael T. Tokarz, Clifton S. Robbins, Scott M. Stuart, Perry Golkin and Edward A. Gilhuly.
- Edward A. Gilhuly left KKR in 2004 to launch SageView Capital together with Scott Stuart. Prior to this, Gilhuly was the managing partner of KKR's European operations, based in London.
See also
References
Works about KKR
Notes
- ^ The History of Private Equity (Investment U, The Oxford Club
- ^ Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990, p. 133-136
- ^ In 1976, Kravis was forced to serve as interim CEO of a failing direct mail company Advo.
- ^ Refers to Henry Hillman and the Hillman Company. The Hillman Company (Answers.com profile)
- ^ Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990, p. 136-140
- ^ Malone & Hyde Accepts Bid New York Times, June 12, 1984
- ^ Wayne, Leslie. Wometco Agrees To Buyout New York Times, September 22, 1983.
- ^ Dodson, Steve. BEATRICE DEAL IS BIGGEST BUYOUT YET. The New York Times, November 17, 1985.
- ^ STERNGOLD, JAMES. Drexel's Role on Beatrice Examined. The New York Times, April 28, 1988.
- ^ FISHER, LAWRENCE M. Safeway Buyout: A Success Story. The New York Times, October 21, 1988
- ^ Feder, Barnaby. Asbestos: The Saga Drags On. New York Times, April 2, 1989.
- ^ Chapter 11 For Kohlberg, Kravis Unit. Associated Press, December 28, 1989.
- ^ Game of Greed (TIME magazine, 1988)
- ^ SORKIN, ANDREW ROSS. "HCA Buyout Highlights Era of Going Private." New York Times, July 25, 2006.
- ^ "Takeover firms will pay $15.3b to buy Danish phone giant TDC." Bloomberg, December 1, 2005
- ^ "TDC-One year on." Dow Jones Private Equity News, January 22, 2007.
- ^ WERDIGIER, JULIA. "Equity Firm Wins Bidding for a Retailer, Alliance Boots." New York Times, April 25, 2007
- ^ de la MERCED, MICHAEL J. "Biomet Accepts Sweetened Takeover Offer." New York Times, June 8, 2007.
- ^ "K.K.R. Offer of $26 Billion Is Accepted by First Data." Reuters, April 3, 2007.
- ^ Source: Thomson Financial
- ^ Lonkevich, Dan and Klump, Edward. KKR, Texas Pacific Will Acquire TXU for $45 Billion Bloomberg, February 26, 2007.
- ^ KKR quits group looking at Australia's Coles | Deals | Mergers & Acquisitions | Reuters
- ^ Harman International press release
- ^ SEC Info - KHI Parent Inc - S-4 - On 6/20/07
- ^ U.S. Securities and Exchange Commission
- ^ NY Times article
- ^ "Terra Firma drops Boots bid plan", BBC (Apr 24, 2007).
- ^ "Dollar General being acquired for $6.87B by equity firm", The Tennessean (2007-03-12). Retrieved on 2007-03-12.
- ^ "KKR, Texas Pacific-led group to buy TXU Corp", Reuters (Feb 26, 2007).
- ^ David Koenig (Feb 26, 2007). "TXU's $32B takeover by KKR-led group draws only muted criticism", Houston Chronicle.
- ^ Sun Microsystems Welcomes Endorsement and Investment From KKR
- ^ Seven in $4bn asset sell-off
- ^ Co-Investment: Bloomberg.com: Europe
- ^ Co-Investment: Buyout Bid For Parent Of Nielsen
- ^ KKR postpones $1.25 bn float as credit chaos deters buyers (Times Online)
- ^ KKR arm in talks after fresh repayment delays
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