KKR's Finally Going Public: Good News or Bad?

Includes: BX, KKR
by: Todd Sullivan

What does KKR's (KFN) decision to finally go public mean? Last August KKR said it had "not delayed" its IPO plans despite earlier reports it would and a year later, here we go. Yeah, that was a bit of a delay boys but, no matter.

The AP reports

The transaction is a big departure from plans announced a year ago by founders Henry R. Kravis and George R. Roberts to tap equity markets for up to $1.25 billion through an initial public offering. Credit market turmoil torpedoed that plan.

Late Sunday, the buyout shop said KKR principals will hold 79 percent of the combined company and KKR Private Equity shareholders will own 21 percent.

No cash will change hands in the deal, which is expected to close in the fourth quarter, and no additional public stock sales are planned. But by having the shares of the combined company trading on the NYSE, KKR said it should have enough cash needed to finance additional takeovers.

The value of the combined company will depend on how KKR Private Equity shares trade in the weeks and months ahead.

KKR Private Equity Investors said in an earnings release Sunday it has 204.9 million units outstanding, giving it a market capitalization of $2.15 billion at the current price of $10.50 per unit. That would suggest a value for the combined company of $10.25 billion.

But in its earnings statement, KKR Private Equity said its net asset value totaled $4.56 billion, or $22.25 per unit, at the end of the second quarter -- nearly double its June 30 market price of $12.75. Therefore, KKR said it will make additional payments if KKR Private Equity shares don't reach a level of at least $22.25 each, which would suggest it values the entire enterprise at more than $21 billion.

Why list now? The optimist in me says that perhaps KKR sees the current environment at or near a bottom, so going public now will lead to significant share price inflation in the future.

The pessimist says that perhaps conditions are getting worse and perhaps raising cash is getting difficult. By listing KKR would be able to raise some additional money that way and even use the stock as currency should it wish.

What to think? I tend to lean towards the former. Using the public route to raise cash at this point would smack of a bit of desperation or worse, a loss of investors willing to give KKR money to invest. Unlike the Blackstone (NYSE:BX) IPO in which insiders sold out at the top essentially, KKR will significantly benefit from any share appreciation incurred as markets recover. Only time will tell but perhaps this will be a mark of a bottom...

On a final note, was Blackstone's IPO perhaps the "market timing" gem of the last couple years? It indeed marked the high water mark for the industry.  

Disclosure: None