KKR & Co LP said it would acquire its specialty finance company KKR Financial Holdings LLC (KFN) in a $2.6 billion deal, paid for with KKR shares trading at an all-time high, that will boost the private equity firm's dividends .
Launched by KKR in 2004 to invest primarily in a variety of corporate loan and bond instruments, KFN now has a market value of $1.9 billion, a fraction of KKR's $17.7 billion market capitalization.
By taking over KFN, however, KKR expects to generate additional earnings by substituting fee revenue it receives for managing KFN on behalf of KFN shareholders with investment income to be generated .
It plans to distribute 100 percent of the investment income it receives from KFN to KKR shareholders. Using a consensus estimate of Wall Street analysts, KKR's total dividend is expected to be 7 percent higher in 2014 as a result.
The transaction has echoes of KKR's merger with KKR Private Equity Investors LP in 2009, a heavily undervalued Amsterdam-listed private equity fund, which led to KKR becoming public and having a much bigger balance sheet than its peers.
While KFN was not as discounted as KPE, it traded at 0.9 times its book value despite its 9.2 percent dividend yield. Its shares are down 9.8 percent year-to-date versus a 64 percent year-to-date rise in the shares of KKR. KKR's offer, which has been approved by the boards of both entities, values KFN at 1.15 times book value.
Source: Reuters
