A Fight Over $24 Billion in Financing [WSJ]
KKR, Banks Maintain Positions on First Data
By HENNY SENDER
August 30, 2007; Page C1
The recent drama over financing for the sale of Home Depot Inc.'s supply unit was in some ways just a warm-up. An even bigger battle between banks and their clients at private-equity firms looms with the impending sale of First Data Corp. to Kohlberg Kravis Roberts & Co.
Banks have committed to lending billions of dollars to buyout firms that are in the midst of buying numerous companies. As investors shun buying these loans from the banks, these Wall Street giants run the risk of being saddled with these loans on their books, hurting their profitability.
FINANCIAL BATTLES
• The Situation: Banks and their clients at private-equity firms are locking horns over financing, such as the impending sale of First Data to KKR.
• Background: What had been a booming market for merger deals is no more, amid the credit-market turmoil.
• What's Next: Will KKR make concessions to the banks? Will the banks hold the debt on their own balance sheets?
One of the biggest such deals is the KKR takeover of First Data, a deal that requires $24 billion in financing. Unlike Home Depot, First Data doesn't have the cloud of housing-market gloom hanging over its future. And KKR has staked out a position as the most intransigent of the private-equity giants when it comes to willingness to give the banks a break.
That makes the confrontation between the banks and KKR the most straightforward clash between the two sides as the deal boom that dominated the first half of the year has spun off the tracks.
So far, KKR has shown a willingness to give some ground, although not on issues that would fundamentally change the outlook for banks and their shares. But the banks are hoping KKR's willingness to compromise will grow over time.
[First Data Corp.]
Shares of First Data, which had dipped to less than $31 in recent weeks, closed yesterday at $32.73, up 27 cents, as investors became more confident that the deal will go through at the $34-a-share offer.
Some of Wall Street's most prominent financiers, from Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc., among others, have been summoned to KKR's 57th Street offices overlooking Central Park, say people familiar with the matter, in what is normally one of the quietest weeks of the year to try to reach a compromise. Other banks involved in the deal are HSBC Holdings PLC, Credit Suisse Group and Lehman Brothers Holdings Inc.
KKR's position is that it can't let banks off the hook without hurting their own investors.
"Why would it be right for KKR's investors for KKR to agree to change the terms of the deal?" says one person familiar with KKR's thinking. "They are standing by their commitment to a public company on a certain price, which was based on the commitments from Wall Street on financing terms. And they will do nothing that puts their [target] company in harm's way."
KKR has been by far the most aggressive of the buyout firms as the buyout boom wore on. It has bought companies at prices 10% to 15% more than any of its competitors, the competitors say, although KKR disputes that. KKR this year has announced deals with a total value of $140 billion it expects to close in the second half of the year, requiring the buyout firm to write checks for almost $12 billion for its portion. KKR has also been the most intransigent in its talks with the banks. Banks agreed to put up financing for the deals, but now are seeking concessions to make the debt more attractive to nervous investors.
Still, by late yesterday indications were that KKR would make some concessions, though not on the matters that most concern the bankers. Also to be decided is whether the banks will hold the debt on their own balance sheets, as is likely, or try to market the debt to investors. People familiar with the matter said they might settle on a blend of the two.
KKR is prepared to negotiate on the small matters, according to those involved in the talks. KKR might, for example, change the time when the debt falls due. Or it might agree to make more debt subordinate. But the banks want KKR to put in strict performance terms and abandon the right to not pay cash interest -- conditions that could limit the flexibility of First Data if it encounters financial headwinds. For the past two years, banks have been able to package loans without strict performance terms and sell them to investors. But the market for those sorts of loans has dried up. That's left banks facing the prospect of large losses.
Talks between the private-equity firms and their financiers underscore just how weak the banks' legal positions have become as the private-equity firms used their market clout to extract favorable terms. Indeed, KKR's principals have said that they are merely following contractual terms to which the banks willingly agreed, according to people familiar with the matter. People familiar with KKR claim the firm will pay out $500 million in fees on First Data alone.
The talks come at a delicate juncture. Investment banks such as Goldman Sachs report their quarterly earnings at the end of this month and are seeking ways to avoid losses when the markets are already spooked about the extent of their exposure to the imploding mortgage market. Potential losses on buyout deals are casting a shadow on all the banks' share prices, which have gyrated during the recent market turmoil. Meanwhile, KKR was supposed to meet with investors in connection with its planned initial public offer in early September. The fate of that planned offer still isn't clear.
First Data isn't a troubled company, and none of the parties involved is threatening litigation. But to some analysts, First Data is the face of the excess of the boom and the buyout based on aggressive assumptions and heavy borrowings. People familiar with KKR dispute that. They say the math regarding the debt load and interest coverage compared with First Data's cash flow is based on faulty calculations that don't include tax benefits and the earnings from various joint ventures.
The talks between KKR and its bankers are being closely monitored by its rivals. For years, other private-equity firms have maintained that KKR is the darling of Wall Street, getting the first calls on potential deals and the even more crucial last calls on how to get over the finish line. That's partly an expression of KKR's long history but also a tribute to the mix of fear and respect that its founders, Henry Kravis and George Roberts, command. |
