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KKR snaps up UK infrastructure investor John Laing in £2bn deal

John Laing board to unanimously recommend KKR’s offer to shareholders to take firm private.

The private-equity firm KKR has agreed to buy the UK infrastructure investor John Laing, which has stakes in Alder Hey children’s hospital in Liverpool and a retirement homebuilding project with McCarthy & Stone, in a deal valued at about £2bn.

The takeover values the London-listed firm at 403p a share, which represents a 27% premium on the closing price of John Laing stock on 5 May, the day before it confirmed it was in talks with KKR.

John Laing has invested in more than 150 projects and businesses since it was founded, across a range of sectors including transport and energy.

The firm, which was floated in February 2015, owns assets including schools, hospitals and infrastructure predominantly in the US and Australia as well as in Europe.

The investor was involved in the 2013 redevelopment of Alder Hey, which was funded through a private finance initiative, and as a result still holds a 40% stake in the hospital.

John Laing said its board intended to unanimously recommend KKR’s offer to its shareholders to take the firm private, adding that it represented a fair and reasonable value for the company.

KKR has also proposed a £175m cash injection into John Laing’s pension fund, accompanied by a further £50m in 18 months.

John Laing’s shares rose by 11% in morning trading on Wednesday, to 402p, just below the offer price.


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This day in buyout history: Meals, monopolies and a $7.1B club deal

On July 3, 2007, private equity firms KKR and Clayton, Dubilier and Rice finalized a $7.1 billion acquisition of US Foods, a foodservice powerhouse that traces its roots back to well before the Civil War.

It was a mega-deal inked during the final months before the global economy entered a crisis. So as you might expect, it led to a relationship that involved its fair share of drama—including plans for a headline-grabbing exit that were thwarted by regulatory fears. In the end, KKR and CD&R waited nearly a decade to realize their investments, eventually doing so in one of the largest PE-backed IPOs of 2016.

KKR and CD&R first announced their pending acquisition of US Foods (known at the time as US Foodservice) in May 2007, agreeing to hand over $7.1 billion to purchase the company from Dutch retail giant Royal Ahold, almost twice the price Ahold had paid for the business seven years prior. The two firms were equal partners in the deal.

With annual revenue of more than $19 billion at the time , US Foods was one of the most powerful names in foodservice distribution, which involves supplying ingredients and meals to caterers, cafeterias, restaurants and other entities that sell food directly to hungry customers. The company is an amalgamation of several older provisioners, including Reid, Murdoch & Company, which was founded way back in 1853.

It was mostly a quiet rest of the decade for US Foods. In 2011, though, the business embarked on an add-on spree, acquiring fellow food distributors with a more local focus such as Ritter Food Service, Vesuvio Foods and Midway Produce. The changes continued later in 2011, when US Foodservice officially changed its name to US Foods.

With some inorganic growth complete, KKR and CD&R began searching for an exit. They thought they found it two years later. But government watchdogs had different ideas.

The firms agreed to sell US Foods in December 2013 to Sysco in an eyebrow-raising $8.2 billion deal, with the fellow foodservice giant set to pay $3.5 billion for US Foods’ equity and assume a further $4.7 billion of its rival’s debt. The deal called for US Foods’ prior backers to assume a 13% stake in Sysco, with KKR and CD&R both assuming spots on the newly combined company’s board.

It was a move that would have merged the two largest foodservice distributors in the US. Which, as you might imagine, drew the attention of the US Federal Trade Commission. The FTC filed an objection to the merger in February 2015, more than a year after it was first announced, seeking an injunction against the move on the grounds it would reduce competition and drive up food prices for hospitals, schools and other customers across the country. That June, the companies officially abandoned the planned deal.

And so KKR and CD&R were left looking for another exit route. This time, they opted for a move to the public market. US Foods filed for an IPO in February 2016, and it completed the listing that May, pricing an offering of 44.4 million shares at $23 each to raise $1.02 billion, larger than any other traditional PE-backed public offering in the US that year, according to the PitchBook Platform.

In its early days as a public company, US Foods had a market cap of a little over $5 billion—a far cry from the $7.1 billion price KKR and CD&R had paid nearly 10 years before. In the ensuing three years, however, the company’s valuation has ticked steadily up. As of June 28, the final trading day of 1H, stock in US Foods was trading at $35.76, for a market cap of $7.81 billion.


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KKR stock surges after first earnings as a corporation

KKR’s conversion to a corporation is paying off for stockholders.

The New York-based buyout shop announced its 3Q earnings on Thursday, including after-tax distributable earnings of $496.7 million, or 60 cents per share, a YoY increase of 21.3% and about in line with analyst predictions. The firm also reported $640.2 million in profit attributable to shareholders, up more than 300% YoY. KKR’s stock responded positively, closing Thursday up more than 6% on a day the market rebounded from a recent sell-off, thanks in part to several strong earnings reports across the corporate spectrum.

KKR changed its tax structure from a partnership to a corporation on July 1 in hopes of making its shares more accessible on indices. As a result, the firm has stopped reporting its economic net income, an opaque metric that publicly traded peers such as Blackstone, The Carlyle Group and Apollo Global Management use to grade performance.

So far, KKR management likes the results.

“We’re encouraged by the earnings we are having,” said Craig Larson, the firm’s head of investor relations. “We feel like we’re seeing an increase in the breadth of our shareholders.”

Co-COO and co-president Scott Nuttall took away positives both from KKR’s results and the wider market downturn, saying the firm will be able to grow at a faster pace if valuations drop.

“We saw this coming out of the financial crisis a decade ago,” Nuttall said. “We can also buy back our stock at lower prices. From our seat, our stock is worth even more today and our firm has even more opportunities and better prospects than a month ago.”



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Bain Capital, KKR to back hardship fund for Toys R Us workers

When Toys R Us closed its US operations at the end of June, the famed toy retailer laid off some 33,000 workers.

Three months later, storefronts across the country where the company used to reside remain empty. And laid-off employees are still waiting for the roughly $75 million in combined severance pay they were once promised by management.

But that could soon change. Bain Capital and KKR have held discussions with workplace advocacy group Organization United for Respect and former Toys R Us employees about setting up a hardship fund to pay back that full $75 million severance figure, with an announcement “hopefully coming soon,” according to a source close to the situation. Late Friday, meanwhile, The Wall Street Journal reported that Bain Capital and KKR are working on a $20 million severance fund.

Bain Capital and KKR didn’t respond to requests for comment.

Setting up this type of mea culpa fund would be a highly unusual move for a private equity industry that typically aims to maximize profits at all costs. But KKR and Bain Capital both received significant blowback from both the public and LPs after Toys R Us suffered a swift demise following a disastrous holiday sales season.

How did we get here?

Bain Capital, KKR and Vornado Realty Trust took Toys R Us private for about $6.6 billion in 2005. The deal reportedly saddled the company with about $5 billion in debt, a total that became impossible to pay down in part because of the rise of online retailers such as Amazon and Walmart. Meanwhile, the lack of available capital made it difficult for the business to adjust to a retail industry that began producing more revenue from ecommerce.

Toys R Us eventually filed for bankruptcy in September 2015, with plans to either find a buyer or restructure the company’s debt load. But lenders including Angelo Gordon & Co. and Solus Alternative Asset Management, a pair of New York-based investors, ultimately decided to shut down the company’s US operations.

In August, both firms sent a letter through law firm Wachtell, Lipton, Rosen & Katz explaining that they “do not believe there is a sound basis to claim that Toys R Us secured lenders should make additional financial contributions for the benefit of employees or other unsecured creditors.” The letter cited the fact Angelo Gordon and Solus had already contributed to a $450 million bankruptcy loan, helped implement a compensation plan that paid out “millions of dollars” to employees and gave Toys R Us additional time to find a buyer after it defaulted on the loan, among other concessions.

Oaktree Capital Management, Highland Capital Management and Franklin Mutual Advisers were also among the secured lenders that opted for liquidation, but none have agreed to contribute to the hardship fund, according to a source. Vornado Realty Trust, meanwhile, has not responded to requests to make a financial contribution.

The outrage over the whole episode has poured over to Capitol Hill. In July, 19 Democratic members of Congress sent Toys R Us’ former owners an informal letter asking about their business practices. And this past week, a group of the store’s former workers in New Jersey lobbied the state’s investment council to pull its $300 million investment in Solus. In the meantime, former Toys R Us employees have lobbied LPs in Texas, Oregon, North Carolina, Virginia, Arizona and Minnesota with investments in the lenders to ask they pay back some of the severance.

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$3.9B Move In The Public Markets

At the start of this month, KKR officially converted from a partnership to a corporation. It was the culmination of a gradual, decades-long shift that’s seen the firm become more and more interested in the public markets, in contrast to its traditionally private-markets-focused PE peers.

KKR’s penchant for exiting investments via IPO is one indication of this philosophy. And its half-decade as a backer of Gardner Denver—a period that began five years ago today, on July 30, 2013—is a prime example.

In this particular saga, the firm’s connection with the stock market began with a search for targets. Gardner Denver, an industrial manufacturer focused on flow-control products for an array of industries, had been publicly traded on the NYSE for 70 years when KKR purchased all its outstanding shares in a take-private buyout valued at $3.9 billion, including the assumption of debt. KKR brought in new management as part of the deal, hiring industry veteran Timothy Sullivan as CEO and president, and appointing Michael Larsen as CFO.

The next four years brought conflicting financial signals for Gardner Denver, with a decline in energy prices wreaking havoc across the industry. The company managed to grow its EBITDA margins steadily under KKR ownership, but revenue declined by some 27% between 2014 and 2016. And something had soon become clear: The debt that KKR had piled onto the company’s existing load in order to execute its buyout was proving problematic. A return to the public markets beckoned.

The company still listed nearly $2.8 billion in total obligations as of March 31, 2017, per an SEC filing. Among a list of other risks, Gardner Denver claimed that it “may not be able to generate sufficient cash to service our indebtedness.”

That may have played a role in the lukewarm response to the company’s roadshow. After initially seeking a price of between $23 and $26 per share for its offering of 41.3 million shares, Gardner Denver ultimately priced its listing at $20 per share for its May 2017 IPO, raising $826 million at an estimated $3.8 billion valuation. The difference between an original midpoint estimate of $24.50 per share and the ultimate $20 per share pricing amounted to some $186 million—a healthy discount from what the company’s investors had hoped for.

In reality, we should maybe use the singular “investor”: KKR owned a 98.6% pre-IPO stake in Gardner Denver and retained a 75% holding upon the offering’s completion.

The company’s stock price hovered in the low $20s for the next several months. By last autumn, however, it began to tick up—first past $25 per share, then past $30. For KKR, that meant it was time to pull out some profits.

Last November 13, the firm announced plans to offer 22 million shares of Gardner Denver; the company closed trading that day with a market cap of about $5.8 billion. KKR announced a secondary offering of another 26.6 million shares for $31 apiece in May, a sale that was set to generate some $823 million in cash. Combined, those nearly 49 million shares that KKR sold in a six-month span represent about a quarter of Gardner Denver’s outstanding stock.

In terms of the traditional buyout cycle of acquisition to exit, KKR’s deal with Gardner Denver may not have generated the sky-high profits to which the PE industry is accustomed. But by holding onto post-IPO shares and playing the stock market, the firm showed the benefits of its emphasis on both the public and private sides of the economy.

This day in buyout history: Full article