Kohlberg Kravis Roberts (KKR) and KKR Financial Holdings (KFN) have entered into a definitive merger agreement in which KKR will acquire KFN for $2.6 billion.
KFN, which is publicly traded on the New York Stock Exchange, is a specialty finance company that is already externally managed externally by KKR. KKR will acquire the company through its balance sheet for an implied per-share price of $12.79, a 35 percent premium over KFN’s $9.45 close Monday, according to DealBook.
KKR will issue 104 million common units to finance the acquisition. The deal remains subject to the approval of KFN’s shareholders. KFN has yet to schedule a shareholder meeting but it expects it to occur in the first half of 2014, according to an US Securities and Exchange Commission filing.
KKR would assume ownership of KFN’s portfolio, which includes more than $2.86 billion in CLOs, direct loans, high yield bonds, mezzanine, special situations, private equity, natural resources and real estate. CLOs comprise 51 percent of KFN’s portfolio, according to a presentation detailing the proposed merger.
The acquisition should have a positive effect on KKR’s overall distributions, which the firm estimates will increase by 7 percent should KFN shareholders approve the merger. The most significant increases will be to KKR’s fee related earnings and adjusted run-rate income generated by KFN.
KKR’s book value will increase from $7.2 billion to $9.3 billion upon completion of the merger.
Interestingly, KFN’ s investment portfolio already includes positions in a number of KKR’s private equity portfolio companies, including US Foods and TXU. The merger of KFN into KKR would create a situation in which the firm’s balance sheet would hold loans to companies managed by its private equity funds.
In September 2012, KFN transferred its stake in TXU to the allocated component of our allowance for loan losses. “Management believed it probable that we would be unable to collect all payments due in accordance with the contractual terms of the loan agreement,” according to a third quarter 10-Q earnings report.
KKR had not responded to questions regarding how those investments will be managed following the merger.