More reasons to short TXU??
Further up this thread, I suggested that TXU might be a good short. This article provides further evidence that the "LBO Put" might be taken away. See especially the highlights about the banks which are increasingly holding more bridge loans are forcing the equity firms to "reduce terms" - loosely translated - offer TXU shareholders less.
I find it a little amusing that the boys at KKR won't be able to get their big personal payday (as Blackstone did) because they didn't get their IPO to the market in time. After Blackstone's belly flop, I can't imagine who would want to take stock in one of these "former" private equity firms. Of course if KKR did make it public, I would probably short it.
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Debt Crunch Hits Deals, Deal Makers and Key IPO KKR
May Find It HardTo Launch Stock Offer,
Let Alone Its Financings
By HENNY SENDER, DENNIS K. BERMAN and GREGORY ZUCKERMAN
July 27, 2007; Page C1
KKR's hardest deal just may be its own.
As flagging debt markets bring the private-equity boom to a halt, the likelihood that Kohlberg Kravis Roberts & Co. will have to postpone its initial public offering is increasing.
Jeff Arricale, who runs a financial-stock mutual fund for T. Rowe Price Group Inc., said he doubts KKR will be able to find enough investors to pull off an IPO if current market conditions continue. "Sure, at some price it is possible to do it, but I'd be shocked if they end up doing this IPO."
Five blocks south of KKR's New York headquarters overlooking Central Park, rival firm Blackstone Group LP is learning just how tough this market has become. Shares of its own initial public offering -- priced just over a month ago -- are now 17% below their $31 debut, and closed yesterday in 4 p.m. New York Stock Exchange composite trading at $25.70, up 19 cents, or 0.7%.
KKR is more vulnerable than Blackstone to the credit-market turmoil. Blackstone is more diversified than KKR, thanks to its real-estate, hedge fund of funds and restructuring-advisory business. About 40% of Blackstone's $88 billion of assets under management, by comparison, aren't in standard private-equity funds. It also has a more consistent history than KKR.
Meanwhile, KKR said in its first filing July 3 that it was trying to complete financing on 11 transactions valued at $140 billion, struck during a deal-making tear begun last year.
Each of these deals -- be it the $44 billion takeover of utility TXU Corp., the $28 billion buyout of First Data Corp., or the $8 billion takeover of Harman International Industries Inc. -- is hitting resistance from debt investors needed to fund their closing.
Should they reject these deals, it won't translate into actual losses for KKR. Instead, Wall Street banks will be on the hook.
But to keep the overall private-equity business going, banks will put pressure on KKR to reduce terms, contribute more equity or bring in new investors. All of these steps increase KKR's risk while also reducing its returns.
That will leave previous valuation estimates in tatters, which could be enough to stop the IPO in its tracks and potentially tarnish KKR's reputation.
Consider the effects of terms -- later rejected, in part -- in proposed financing for the $22 billion buyout of British retailer Alliance Boots PLC, also a KKR transaction. Last week, banks offered to pay an extra half-percentage point annually to investors on a $10 billion term loan, or an additional $50 million a year.
So far, the underwriters say there has been no pullback on timing or commitment for KKR's IPO, according to a senior executive at one of the investment banks underwriting the offering.
The firm declined to comment yesterday. A person close to KKR, however, said the IPO was expected to hit the market sometime in late September. By then, he added, conditions may have calmed. "Markets go up and markets go down. It may make sense to hold off. A lot of work still has to be done," this person said.
Another factor that doesn't bode well for KKR's IPO: Apollo Management LP executives are being asked questions about deteriorating credit markets as they begin meeting with investors in connection with their own planned initial public offering. And this is occurring despite the fact that Apollo is asking for a far more modest valuation than KKR is expected to seek -- likely between $6 billion and $8 billion. Moreover, Apollo is attractive because of its history of successful investing in troubled companies and in times of market distress.
The ripple effects of the tightening deal and credit markets are expected to exert large influence on KKR, which has built its business model by striking the largest big-ticket deals. While some KKR deals have been postponed, the deals that have been completed have left both buyers and the banks bloodied. For instance, KKR paid $7.2 billion for retailer Dollar General in an auction in which Bain Capital Partners LLC, Blackstone and TPG all dropped out over price.
To get Dollar General completed, the banks had to rejigger the offer, divide the loans into two separate pieces and sell the debt at a big discount. Underwriters took back most of the $725 million of junior notes, selling them into the market at below 90 cents on the dollar.
Also sure to weigh on IPO prospects, KKR founder Henry Kravis has a long history of berating the banks. Many investors still recall an appearance Mr. Kravis made at a Merrill Lynch & Co. high-yield conference in 1990, where he criticized the banks for not supporting the RJR Nabisco deal, which remains the largest deal ever when adjusted for inflation. Moreover, the preliminary offer memo for KKR is full of plans to develop a global capital-markets business that would result in far fewer fees going to Wall Street.
But KKR needs Wall Street's help to ensure the deals are pulled off. KKR is having a hard time, for instance, attracting equity commitments on its recent deals, such as the planned buyout of First Data.
Many fund investors such as endowments and pension funds -- known as limited partners -- say they have so much exposure to KKR deals they can't take any more. They have since come up with a new plan. These investors are looking to sell off some of their holdings in old KKR funds to the banks. These banks would then sell those interests to new investors, offering to pay a guaranteed rate of return.
Using this maneuver, the institutional investors can drop their overall exposure to KKR deals, thus freeing more capital to get into such transactions as First Data.
Still, while the underwriters of KKR's IPO plan to go forward, the senior executive at one of the underwriters said, "In this kind of market, you have to ask what is happening." |
