KKR seeks backing for Safeway offer

Kohlberg Kravis Roberts (KKR), the US private equity house which last year completed Europe’s largest ever LBO, is preparing the financing for its proposed £3bn-plus bid for UK supermarket chain Safeway.

The firm has held talks with a consortium of banks, including Lehman Brothers, JP Morgan, Credit Suisse First Boston, HypoVereinsbank and Royal Bank of Scotland to arrange the debt package for the deal, which could make up as much as 70 per cent of the total bid, according to a report on Reuters.

Typically, buyouts firms would arrange financing for a deal of this type only after having reached agreement with the vendor over price. However, given the level of KKR’s European interests, which include Legrand (acquired for E3.7bn in December) and an industrial portfolio acquired from Siemens for E1.7bn in July, the firm’s offer will be subject to approval from the European competition commission. The UK commission is only responsible for deals where two-thirds of both the bidder and the vendor’s turnover originate from the UK.

KKR will have to present its case to the EU competition commission even though its offer will not impact on competition within the food retailing sector, either in Europe or the UK. Three of KKR’s rivals for Safeway – Tesco, Sainsbury and Asda –  are the three leading UK supermarket chains and will have to convince the UK Office of Fair Trading (OFT) that their respective offers should not be referred to the UK competition commission. Such a verdict would delay the process for several months and give KKR a possible advantage in the bidding.

Lehman Brothers, Credit Suisse First Boston and Royal Bank of Scotland have all participated in recent KKR transactions in Europe, as lead arrangers and joint bookrunners for the Legrand financing, which comprised E2.2bn of senior secured credit, a E100m cash bridge facility and a E600m subordinated mezzanine bridge loan. KKR would look to raise around £2bn in debt for this new transaction.