KKR Proposes A Double Secret Reverse IPO

Kohlberg Kravis Roberts & Co. today announced that it will not proceed with the IPO it filed for two years ago (which we already knew). It also scotched a revised NYSE listing scheme proposed last year, which would have included the absorbtion of an Amsterdam-listed affiliate called KKR Private Equity Investors (a plan I’ve been referring to as KKR’s un-IPO).

Instead, KKR has come up with a third path to publichood: It wants to merge part of its management company with the Amsterdam-listed affiliate (KPE), but keep the combined entity trading Dutch for a little while longer. In other words, KKR would actually be going public (albeit on NYSE Euronext instead of NYSE proper).

There have been some media reports that KKR is “dropping” or “abandoning” its Big Board listing ambitions (The FT is a major culprit), but it’s simply untrue. The new agreement would give KKR the option to float the combined entity in New York for the next 12 months, after which the option would be transferred to KPE. That deadline is really more a backstop than anything else, with KKR most likely to price in New York next spring (after IPOs for Dollar General and HCA, perhaps?).

Remember, some of the largest institutional shareholders in KPE are U.S.-based mutual funds, and they’re in it for the New York listing. No way they’d let the 12-month deadline slide (save for a Lehman-type event), and there’s even less chance that KKR would want to be publicly strong-armed into an exchange switch.

Under terms of the proposed deal, KPE shareholders would receive a 30% stake in the combined entity, compared to the 21% stake they would have received via the original merger. It’s this increased ownership that has convinced many of KPE’s institutional holders to indicate approval of the deal, including Black River Asset Management Franklin Templeton, Lexington Partners; Putnam Investments and RS Investments. Those investors hold around 44% of KPE’s outstanding units.

A source tells me that the proposed deal would value the combined entity at between $6.5 billion and $7.5 billion, with KKR itself being valued at between $4 billion and $5 billion. That’s a heady drop from the $16 billion to $18 billion that KKR originally expected the combined entity to be worth, but is in line with Blackstone Group’s drop in value (BX stock currently trading at around one-third of its IPO price).

It’s worth noting that the above valuation doesn’t mesh with KPE’s current market cap, but instead is based on a percentage of assets under management (to which KPE is trading at a significant discount). That percentage was derived by using Blackstone as a comp, after removing the value of Blackstone’s advisory business.

To sum up: KKR moved closer to an IPO on the very day that it withdrew its IPO registration with the SEC. Not something you see too often…