Kohlberg Krevis Roberts (KKR) has announced to acquire its separately listed speciality finance company and credit affiliate KKR Financial Holdings LLC (KFN) for an all equity transaction worth $2.6 billion.
KFN was launched by KKR in 2004 to invest primarily in corporate loans and bond instruments. Although it still has a low market cap of $1.9 billion as compared with that of KKR's market cap of $17.7 billion. Under terms of the deal, KKR will issue 0.51 shares in lieu of each share of KFN. As per Monday's closing price it values the KFN at $12.79, a premium of 35%. After this announcement, shares of KFN rose by 31% and that of KKR dipped marginally.
KKR plans to distribute 100% of investment income it receives as part of KFN business as dividends to KKR shareholders. As per such involvement, KKR's dividend is expected to be 7% higher. KFN wa trading at 90% of its book value despite of its high dividend yield of 9.2%. Moreover, KKR is paying KFN 1.15 times its book value.
Post transaction, KKR's exposure to private equity will dilute from 68% to 44%. Moreover as of now KFN's assets are taken care of by KKR's staff only. Therefore there is very little integration risk available in the deal. Goldman Sachs is the leading advisor of KKR for this transaction.
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