KKR to buy KKR Financial Holdings for $2.6 billion - all equity transaction

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.   

AIG to sell ILFC for $5.4 billion

New York based multinational insurance giant, American International Group (aka AIG) has announced to sell majority stake in its aircraft leasing unit International Lease Finance Corp. (ILFC) to AerCap Holdings, for $5.4 billion.  AIG has been trying to sell stake in ILFC since the global economic meltdown in 2008 when AIG came around near-bankruptcy and government bail out was done.

International Lease Finance Corporation is a leading aircraft lessor based in California and is the largest aircraft lessor in value terms.  It leases Boeing and Airbus aircraft to leading airlines across the globe.  The company was acquired by AIG in 1990 for $1.3 biilion in stock swap.  While AIG was going through the worst fortune of its history it tried to come out of non-core operations i.e. non-insurance operations.  In September 2011, company tried to spun off ILFC through a initial public offering.  But same was not materialized.  Thereafter, company announced the sale of 90% of stake in ILFC to consortium of Chinese companies to repay its government bailout of $182.5 billion.  But same was backed up by August 2013.

Although the deal announced now also faces a lot of regulatory approvals, both US and international, and if cleared it will close in Q2 2014.  ILFC owns a fleet of 989 aircraft.  A sper the terms of the deal, AIG will get $3 billion in cash and 97.6 million shares of AerCap Holdings i.e. 46% of AerCap's stock.  Apart from this AIG has also agreed to provide $1 billion five year unsecured revolving credit facility when the deal closes.

AerCap is the world's largest aircraft leading company in value terms.  It is head-quartered in The Netherlands.  Its fleet comprised of 337 aircraft.  Out of these 250 are owned by company and rest are managed on behalf of third parties.

As per company management, this transaction provides strong foundation for ILFC for continued market leadership and growth.  Company will, after this merger, be more strategically positioned to take on formidable rival GE Capital Aviation Service with fleet size of 1700 aircraft.

In Moday trading shares of AIG rose by 2.2% and AIrCap's stock by 33%.  It seems to be a win-win situation for both companies.   

KKR provides conditional commitment to WMI Holdings Corp.

WMI Holding Corp., fka Washington Mutual Inc, provider of financial services to individuals and small businesses, today announced that KKR & Co. L.P. has entered into a conditional commitment letter to make a strategic investment in the company.

WMI holding Corp. has major business chunk though WM Reinsurance Company, Inc. domiciled in Hawaii.  Apart from this company provides financial services consisting of mortgage banking, consumer banking , commercial banking and consumer finance to individuals and small and mid sized businesses.

KKR & Co. L.P. is a leading global investment firm with $90.2 billion in AUM as of September 30, 2013.  KKR seeks to create value through operational excellence in its portfolio companies.

As per this agreement, KKR has agreed to purchase $10.55 million worth of convertible securities at price per share of $1.10.  Apart from this KKR has also committed to purchase additional subordinated 7.5% PIK notes worth principal amount $150 million.  Apart from this KKR would have the right to partcipate upto 50% of equity offering capped at $1 billion.  KKR will provide deep opportunity to WMI with its deep experience across different asset classes.

Blackstone Advisory Partners L.P. are the advisor for the company for this transaction and strategic investment.  

Texas community bank closed : 24th in the year List, is it towards end of community banks ?

Woodlands based Texas Community bank NA was closed and taken over by Federal Deposit Insurance Corporation (FDIC).  Out of $160.1 million of bank's asset, $147.9 million of assets have been purchased by Spirit of Texas Bank.

On Friday December 13, 2013 Texas Community bank NA was closed by Office of the Comptroller of the Currency and same has been handed over to FDIC.  No prior notice was given to any of bank's customer.  Although FDIC issued a notice reassuring all customers of bank regarding the safety of their assets.  All deposit accounts are immediately transferred to College Station based Spirit of Texas Bank SSB.  All the branches of  Texas Community bank will reopen as branch of Spirit of Texas Bank, which has 8 locations in Houston area. 

As of September 30, 2013 Texas Community bank had $160.1 million in total assets and $142.6 million in total deposits.  Spirit of Texas Bank has agreed to purchase $147.9 million of failed assets of former bank.  The rest will be taken over by FDIC.  Although it is not a major set-back for FDIC, as it have only $10-11 million impact on deposit insurance fund.  

But the small impact is not the end of the story.  This is 24th bank in this year to be taken over by FDIC.  Apart from community banks there are many small financial institutions that are struggling to operate.  So now the future lies in big institutions. Can we see more consolidation in near future ?

Global Payout and CCS Prepay announce joint venture

Global Payout, Inc. and CCS Prepay UK Ltd. has announced the joint venture agreement to pool their US and international debit cards' product and resources, in order to strengthen the product base and more efficiently support client requirements.  

Prior to this, last month, during mid November both companies have signed a product sharing agreement on an EMV Visa international debit card with a partner bank in Europe.  By the end of this month companies expect to complete the joint venture with the effective terms and conditions.  

This joint venture will enable both companies to share their product details and specifications with the other party.  Moreover it also allows each company to deploy the other company's prepaid product to match and best fit the new client needs, as and when such situations arise.  As per both company's management, though the product offering by both companies vary across many factors but they are complimentary to each other.  They are expecting to share new revenue stream in competitive situations.  It will be a win-win situation case for both client and company.  

As market of the prepaid card has started to mature, this move has been looked as going out of coveted geographic areas and look for other venues for sale and client base.  The move will help both companies to leverage not only technology expertise but also become strategic partner for long.   

QuickPay Corp. raised $5.5 million funding

Mobile parking payment solution provider, QuickPay, has raised $5.5 million funding from Fontinalis Partners, Ecomobilite Ventures and IncWell.  The new funding is aimed to increase the base of company across more cities in United States.  

QuickPay was founded in 2010 with a vision to leverage trends in mobile technology to remove the atrocities of finding, paying and accessing parking space across States. The unique mobile application provides its users the facility for finding, paying, opening parking gates via their mobile phone.  Same application works for parking owners in the reverse manner as it let them access the details of parking space more efficiently.  Prior to this QuickPay has received $3.5 million in seed funding.  

As per company management smart parking is a segment of nest generation mobility solutions.  Moreover the internal investors are too happy with QuickPay's success till date.  QuickPay has recently announced the partnership with ABM parking services which operates 2000 parking location across United States.  Apart from this company has also partnered with Impart, which is a leading provider of parking space across Canada.      

Torrent Pharmaceuticals deal with Elder Pharmaceuticals' worth Rs. 2004 crore

Mumbai based Torrent pharmaceuticals has announced the acquisition of Mumbai based Elder Pharmaceuticals' branded domestic formulation business in India and Nepal for Rs. 2004 crore.  

Elder pharma's Indian business comprises a portfolio of 30 brands including market leading brands in women healthcare, pain management and wound care.  Torrent with a turnover of Rs. 32,000 crore will fund the acquisition with internal accruals and bank borrowings.  Under the proposed transaction, Elder pharma which has six manufacturing facilities will for the next 3 years continue to manufacture and supply the products for Elder pharma. The business currently stands at Rs. 500-600 crore out of total Rs. 1000 crore domestic formulations business.  

But market is not able to grasp the know-how of the deal. Elder pharma lost more than 8% and Torrent too lost more than 4% on day of acquisition.  For Elder pharma the major part of Rs. 2004 crore will be moved towards debt i.e. Rs. 1148 crore, while Rs. 500 crore are current liabilities.  Moreover now company is left with its 40% business which mostly is low margin based.  These businesses segments are anti-infective and contract manufacturing segments. 

Torrent too will have a effect on its balance sheet.  Current debt of Rs. 913 crore and debt to equity of 0.4 are both poised to increase after this acquisition.  This has led analysts for concern.  Moreover Torrent's margin were always higher than Elder's margins and this will also put a strain on profitability.  While Torrent works on average 22-23% margin, Elder pharma has at-most 16%.  

Analysts are divided on valuation of the deal too.  This deal was supposed to value around Rs. 1700 crore initially but finally landed for over Rs. 2000 crore.  The deal now implies 3.9 times sales and 17.5 times EBITDA, which is on a higher end as per industry multiples.  But apart from this it is expected that Torrent will be able to ramp up the operation better than Elder Pharma and this will, in long run, make this deal a win-win situation for both the companies.