KKR Files to Raise Up to $1.25 Billion in an IPO
By Elizabeth Hester and Jason Kelly

Henry Kravis of Kohlberg Kravis Roberts & Co. July 3 (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, the third by a U.S. leveraged-buyout firm this year.

Proceeds from the sale will be used to expand and finance LBOs, and founders Henry Kravis and George Roberts won't sell any shares, the New York-based firm said today in a filing with the U.S. Securities and Exchange Commission. Stephen Schwarzman and Peter G. Peterson, who started rival Blackstone Group LP, took home $2.56 billion in the firm's IPO last month.

KKR wasn't deterred by the 4.1 percent drop in Blackstone's shares since the $4.75 billion offering or the recent decline in the stock of Fortress Investment Group LLC, which went public in February. It also wasn't scared off by U.S. legislators' plans to make private-equity firms pay higher taxes or investors starting to balk at financing leveraged buyouts.

"Even with everything else going on, KKR is a fundamentally good business,'' said Paul Schaye, managing director of New York- based Chestnut Hill Partners, which finds deals for private- equity firms. "They didn't get here by doing stupid things."

The filing shows how far Blackstone, founded nine years after KKR, has outrun the firm. Blackstone oversees $88.4 billion, compared with $53.4 billion at KKR. 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 the year earlier.

Investors value Blackstone's shares at 14 times earnings, giving it a market valuation of $32.2 billion. On that basis, KKR would be worth about $15.8 billion, though it may not fetch that much given its slower profit growth.

Underwriters

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.

KKR didn't disclose the number of shares or price for the sale in today's filing. The $1.25 billion value given in the filing was an estimate used to calculate the SEC registration fee. The company will be known as KKR & Co. LP and trade on the New York Stock Exchange under the symbol KKR.

Kravis and Roberts plan 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.

Kravis and Roberts, his cousin, created the firm that bears their names along 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 firm's recent deals include proposed buyouts of TXU Corp. and First Data Corp., the two biggest U.S. private-equity transactions, according to Bloomberg data. KKR 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.

Investor Skepticism

KKR's rapid pace of dealmaking may come back to haunt it as investors balk at buying the bonds and loans that takeover firms rely on to finance deals. Dollar General Corp., which the firm agreed to buy earlier this year, cut its planned sale of junk bonds by $725 million on June 28, according to a person familiar with the offering.

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 today, after bankers on the deal postponed a planned debt offering June 26.

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.

Carlyle, Apollo

As firms including KKR, Blackstone and others have grown, founders have sought ways to liquidate some of their holdings through offerings as well as find new ways to raise permanent capital that can't be withdrawn by investors. 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.