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KKR, Goldman reach $400m accord with Harman

KKR and Goldman Sachs have struck a $400 million deal allowing them to terminate their agreed $8 billion buyout of Harman International Industries without litigation or paying a breakup fee to the audio equipment maker.

Private equity firms Kohlberg Kravis Roberts and Goldman Sachs Capital Partners have terminated their $8 billion (€6 billion) buyout of Harman International Industries, but have agreed to invest $400 million in the US audio equipment maker and subsequently avoid any litigation and breakup fees.

Late last month, the buyout firms said a material adverse change has occurred in Harman’s business, and that the company breached their contract, according to a statement issued by Harman, which disputed the claims.

The deal struck between the parties holds that KKR and GSCP may terminate the buyout

Although we do not agree with the reasons for cancellation of the original merger agreement, we view this $400m investment as a vote of confidence…

Sidney Harman

agreement without paying any breakup fees or triggering litigation, and will purchase $400 million of 1.25 percent senior notes convertible under certain circumstances to Harman stock at a price of $104 per share. KKR and GSCP have agreed not to sell or hedge their position for at least one year, according to a statement. Proceeds from the investment will be used to repurchase Harman common stock through an accelerated share repurchase programme. KKR member Brian Carroll is also to join Harman’s board.

“We are pleased to have reached an understanding with KKR and GSCP,” said Harman executive chairman, Sidney Harman, in a statement. “Although we do not agree with the reasons for cancellation of the original merger agreement, we view this $400 million investment as a vote of confidence in our business and its prospects for continued growth.”

Henry Kravis, KKR co-founder, praised Harman in a statement and added: “The merger unfortunately could not be completed, but we are pleased to make this investment in the company. We believe this investment and our representation on the board is an outstanding way to support Harman and its management team in the future.”

The Harman deal is one of several that have recently been axed in the wake of the global liquidity crisis, with buyers claiming material adverse changes occurred in the targets’ businesses. The $25 billion buyout of US student loan giant Sallie Mae was shelved by a JC Flowers-led consortium, and now appears headed for the US court system, while Silver Lake and ValueAct Partners dropped their $3 billion buyout of data company Acxiom.

Lone Star, a Texas-based private equity firm, invoked the MAC clause in its attempt to walk away from a $400 million agreement to buy subprime lender Accredited Home Mortgage. The mortgage company in turn sued the buyout firm to force the sale, which prompted Lone Star to offer to proceed with the buyout at a reduced price. The two firms eventually inked a $296 million agreement and dropped pending lawsuits.