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Monday, May 14, 2007

KKR’s spending spree raises questions (Financial Times)

KKR’s spending spree raises questions
By James Politi and Francesco Guerrera in New York

Published: May 13 2007 22:04 | Last updated: May 13 2007 22:53

Kohlberg Kravis Roberts has become by far the most active firm in the booming private equity industry in 2007, sealing $122.5bn worth of deals since January, more than it secured in the previous two years combined.

Including the record $45bn buy-out of TXU, the Texas-based energy group, and the $20bn takeover of Alliance Boots, the UK drug store chain, KKR has grabbed a 44.1 per cent share of all global private equity deal volumes in 2007, according to Dealogic. This compares with its near-20 per cent average share of global buy-out volumes since the beginning of 2004.

But its spending spree has raised questions about whether KKR is splashing too much money too quickly, given that several of the firm’s chief rivals, including Steve Schwarzman’s Blackstone, are much less active.

“I think they [KKR] have definitely become more aggressive, even in their pricing,” says one senior investment banking executive.

The acquisition spree from KKR reflects a belief that the current health of credit markets makes it an ideal time to spend the war-chest worth billions of dollars accumulated by Henry Kravis and George Roberts, the veteran financiers and co-founders.

Francesco Guerrera on KKR: Golden era for private equity, or arms race with Blackstone?
Marc Lipschultz, one of KKR’s most senior executives, says: “Most of our deals are large and complex, the result of proprietary ideas that have been worked on for years and years.”

Blackstone, which is gearing up to go public on the New York Stock Exchange as early as next month, has struck less than $15bn worth of deals this year, although the firm is involved in a number of auctions that could rapidly lift that figure.

According to Dealogic, KKR deals have accounted for more than twice the deal volume of the private equity unit of Goldman Sachs, the second most active buy-out fund, with $56.2bn worth of transactions.

Fort Worth-based TPG, New York-based JC Flowers and London-based Permira have also been relatively active this year, as have investment banks such as Citigroup, Lehman Brothers and Morgan Stanley, which have been writing more equity for leveraged buy-outs.

KKR has also been studying an initial public offering and other ways to take advantage of the industry boom. But it appears less likely than some of its peers to move rapidly towards that goal, although it did raise a new $5bn fund last year in a public offering on the Amsterdam bourse.

As well as striking several large and high profile deals, KKR has also been aggressively pursuing an Asian expansion, which it launched in late 2005 and is being accompanied by a dedicated fund for transactions in the region.

For decades, KKR had dominated the private equity industry, making huge profits from buy-outs during good times such as the junk-bond-fuelled merger frenzy of the 1980s and emerging intact, if wounded, from tough times such as the collapse of the dotcom boom.

Most famously, KKR sealed in 1989 the $30bn takeover of RJR Nabisco, immortalised in the best-seller Barbarians at the Gate.

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