KKR seeks listing

KKR, Joining Rival Blackstone, to Raise $1.25 Billion in IPO
By Elizabeth Hester and Jason Kelly

July 4 (Bloomberg) -- Kohlberg Kravis Roberts & Co., the company famed for its takeover of RJR Nabisco Inc., plans to raise as much as $1.25 billion in an initial public offering that will help fund its appetite for the biggest buyouts.

The company will use the money to expand and to finance deals, according to its filing yesterday with the U.S. Securities and Exchange Commission. Founders Henry Kravis and George Roberts won't sell any shares. Stephen Schwarzman and Peter G. Peterson, who started rival Blackstone Group LP, took home a combined $2.56 billion in the firm's IPO last month.

KKR, based in New York, has taken part in $200 billion of leveraged buyouts in the past 12 months, data compiled by Bloomberg show. They include the second- and third-largest LBOs, the pending purchases of electricity producer TXU Corp. and First Data Corp., a credit-card payments processor.

``Fund-raising is a time drain,'' said Paul Schaye, managing director of New York-based Chestnut Hill Partners, which finds deals for private-equity firms. ``This means they don't have to go back to the market so much.''.

Thirteen percent of KKR's assets, or $6.8 billion, is ``permanent capital'' that isn't required to be returned to investors and can be redeployed as portfolio companies are sold.

Kravis and Roberts, cousins who founded the firm in 1976, weren't deterred by the 4.1 percent drop in Blackstone's shares since its $4.75 billion offering or the recent decline in the stock of Fortress Investment Group LLC, which went public in February. They also weren't scared off by U.S. legislators' plans to make private-equity firms pay higher taxes or investors who have started to balk at financing buyouts.

Blackstone
The SEC filing shows how far Blackstone, founded nine years after KKR, has outrun the firm by diversifying into real estate and hedge funds. Blackstone oversees $88.4 billion, compared with KKR's $53.4 billion. Net income at KKR rose 12 percent last year to $1.11 billion, half of New York-based Blackstone's profit of $2.27 billion, which was up 70 percent from a year earlier.

Blackstone's shares trade at 14 times earnings, giving the company a market value of $32.2 billion. On that basis, KKR would be worth about $15.8 billion, though it may fetch less given its slower profit growth.

Kravis and Roberts, both 63, hired Morgan Stanley and Citigroup Inc. to manage the offering. The New York-based firms also underwrote Blackstone's IPO. Simpson Thacher & Bartlett LLP is providing legal counsel.

New Name
The company didn't disclose the number of shares it would sell or their anticipated price. The $1.25 billion value given in the filing was an estimate used to calculate the SEC registration fee. The company will be renamed KKR & Co. LP and trade on the New York Stock Exchange under the symbol KKR.

KKR, like Blackstone and Fortress, plans to organize as a partnership, which would allow income to flow directly to shareholders without an additional layer of corporate taxes. Investors could pay taxes as low as the 15 percent capital-gains rate. Blackstone's IPO boosted efforts by lawmakers to propose bills that would require some hedge-fund managers and most private-equity firms to pay tax rates as high as 35 percent as corporations do.

As with Blackstone and New York-based Fortress, KKR's principals will control the company and investors will have little say in how it's run.

Kravis and Roberts started the firm that bears their names with Jerome Kohlberg, their colleague from Bear Stearns Cos. Kohlberg subsequently left and started his own buyout shop, Kohlberg & Co. LLC.

`Barbarians at the Gate'
Kravis made himself famous and pushed LBOs into the spotlight with his hostile takeover of RJR in 1989, a deal whose complications and tensions were chronicled in the book ``Barbarians at the Gate.'' Since that deal, Kravis and Roberts have expanded their business overseas and done ever-larger deals even as competitors pile into the once-quiet buyout world the pair helped create.

KKR's Millennium Fund, closed in 2002, has delivered a net internal rate of return of 41 percent to investors, according to the filing, making it KKR's best-returning pool.

The company paid Wall Street firms $757.9 million in 2006 for takeover advice and financing, the most of any private- equity company, according to estimates by industry consultants at New York-based Freeman & Co. Last year, it raised $5 billion by selling shares in a fund that trades in Amsterdam.

KKR's rapid pace of dealmaking may come back to haunt it as investors hesitate to buy the bonds and loans that takeover firms rely on to finance deals. U.S. Foodservice, a unit of Dutch supermarket Royal Ahold NV, agreed to be bought by KKR and Clayton Dubilier & Rice Inc. in May. The transaction closed yesterday, after bankers on the deal postponed a planned debt offering June 26.

Carlyle, Apollo
Private-equity firms raised a record $210 billion in 2006, a 57 percent increase from the previous year, and the larger pools have pushed them to do more and larger deals. Buyout shops have announced $608 billion of takeovers so far this year.

Leveraged buyout firms use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance deals. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors in initial public offerings.

As KKR, Blackstone and others have grown, founders have sought ways to profit from the value of their firms as well as find new ways to raise permanent capital. Apollo Management LP and Carlyle Group have said they are weighing public offerings of their own.
Hedge funds also are testing the markets. Och-Ziff Capital Management Group LLC, the investment firm run by former Goldman Sachs Group Inc. trader Daniel Och, filed July 2 to raise $2 billion in the largest initial public offering by a U.S. hedge- fund manager.

The New York-based company will borrow $750 million that will be paid to Och and other owners before the share sale. They will reinvest the proceeds into their funds for five years.