- Posted at 6:54, December 17, 2013
- By Russ Bleemer
An already wholly-owned KKR & Co. holding company that invests in commercial real estate is being merged into the parent company, according to an announcement the company made yesterday after markets closed.
KKR Financial Holdings LLC is valued in the all-equity merger at $2.6 billion. The company consists mostly of corporate loans and securities, but it also holds "working and royalty interests in oil and natural gas properties as well as interests in joint ventures and partnerships focused on commercial real estate and specialty lending."
It has been a public, NYSE-traded company since 2007, and succeeded a three-year-old REIT.
The parent is the now-publically traded company famous for private equity deals that is headed by legendary Wall Street takeover executives Henry Kravis and George Roberts.
The current structure has KKR Financial Holdings LLC, according to the firm's description, managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of KKR Asset Management, which is a wholly-owned subsidiary of KKR."
The companies put out a joint press release late yesterday afternoon that detailed the benefits to the holding company shareholders in the stock swap--basically, a premium on their shares--and the parent in the newly integrated company.
On the latter, the parent company spells out in the press release what it gets, including the real estate component:
- Acquisition of a finance business with a complementary and known portfolio of assets and an attractive capital structure. [KKR Financial Holdings LLC, referred to by its ticker symbol, KFN] is a specialty finance company with a $2.9 billion portfolio invested in a complementary set of strategies, which KKR currently manages. In addition, KKR will preserve KFN's attractive funding structure, including $1 billion of long-term, largely fixed-rate debt and perpetual preferred securities, all of which will remain obligations of KFN without recourse to any other KKR entity.
- Additional balance sheet scale to support KKR's growth initiatives. Since acquiring its balance sheet through the combination with KKR Private Equity Investors L.P. in 2009, KKR [& Co.] has committed over $2.5 billion of capital across strategies including private equity, real estate, energy, leveraged credit and special situations. Pro forma for the transaction, KKR's permanent capital base will increase further: book value as of September 30, 2013 is expected to rise from $7.2 billion to $9.3 billion, while book value per adjusted unit will grow by 13% from $10.07 to $11.34. This additional scale and financial flexibility will support the continued growth of KKR's business by providing:
- Significant capital to support the further build-out of KKR's investment management strategies;
- Potential for increased exposure to capital market transactions that KKR sources;
- Accelerated growth of KKR's new businesses; and
- Incremental capital for pursuit of inorganic growth opportunities.
- Acceleration of KKR's balance sheet objectives. The acquisition of KFN will accelerate the diversification of KKR's balance sheet holdings, in addition to increasing their liquidity and yield profile.
- Accretive to size and quality of distribution. Through the distribution of KFN's realized earnings, the transaction is expected to meaningfully increase the more predictable and recurring component of future KKR distributions. It is also expected to increase KKR's total distributable earnings per unit and total distribution per unit.
- Minimal integration risk. Integration risk is minimal as KFN's assets are already managed by KKR.
The merger has been approved by both boards and is expected to close in 2014's first half. KKR executives discussed the transaction in a conference call about 40 minutes after the merger announcement was placed on the Business Wire last night. The transaction will bring "more permanent capital, more recurring balance sheet income, and more net cash flow to invest behind our ideas and continue to build our firm," said Craig Larson, KKR's managing director for investor relations, on the call. You can listen to the briefing on the company's website in its entirety HERE. The link also includes a Powerpoint covering the merger's specifics.
You can see the companies' full press release HERE.
Reuters' analysis this morning of the market effects of the transaction can be found HERE.