KKR (Firm Involved In TXU Sale) To Go Public

When I picked up a copy of the New York Times in the hotel lobby this morning and turned to the second section, this headline jumped out at me about the KKR Initial Public Offering. Here’s a tidbit via the NYT:

Less than two weeks after the Blackstone Group, its archrival, started trading as a public company, Kohlberg Kravis filed documents late yesterday to raise $1.25 billion.

Deals to take private equity and hedge funds public are now happening at a frenzied pace, suggesting that these funds might see a limited window in which to gain access to the public markets.

The outlook for private equity firms has worsened over the last month, with leading members of the Congressional tax-writing committees introducing legislation to raise taxes significantly on private equity managers. The Congressional broadside attack was accompanied by a marked deterioration in the debt markets, with the cancellation or repricing of several prominent bond sales, reflecting investors’ concern about the risk inherent in those instruments. The boom in buyouts has been largely fueled by the availability of cheap credit.

And yet hardly a day has passed without another hedge fund or private equity firm announcing that it would go public. The Fortress Investment Group blazed the path in February, followed by Blackstone. Last week, GLG Partners, one of London’s leading hedge funds, announced that it would go public through a complex reverse merger. On Monday, the Och-Ziff Capital Management Group, a $27 billion hedge fund, announced that it would sell units to the public.

Founded in 1976 by three Bear Stearns alumni, including the cousins Henry R. Kravis and George Roberts, Kohlberg Kravis is credited with creating the leveraged buyout, where public companies, often seen as undervalued by investors, are bought with cash and a large amount of borrowed money. Private equity firms then make changes to the companies — like replacing management or selling divisions — before selling them or taking them public again, reaping profits along the way.

Kohlberg Kravis’s most famous buyout, the takeover of RJR Nabisco, was chronicled in the book and movie “Barbarians at the Gate.”

…

Kohlberg Kravis has long been one of the most aggressive private equity firms, and this year has been no exception. The firm announced 11 deals in 2007 with a combined value of $121.1 billion, more than any of its rivals, according to data from Dealogic. It is one of three firms that have agreed to pay $45 billion for TXU, the Texas energy giant, in what is the largest leveraged buyout in the United States.

And, what of that deal? Obviously, a publicly traded private equity firm will have to answer to a lot more people (ie, stockholders, Wall Street) than a private one. Could the TXU deal now be too much of a risk for KKR? When the company goes public could its stock price decline every time TXU is dealt a setback in a Texas court or by a state regulatory agency?

Who knows? Not being a financial analyst, I can’t tell you what effect the KKR IPO will have on TXU. However, I suspect it will be something.

I also found it interesting that former U. S. Commerce Secretary Don Evans (a name mentioned for Texas Governor in 2010, by the way), had a nice puff-and-fluff guest Op Ed/bitch fest in the Dallas Morning News in response to an investigative report by the paper claiming how much TXU invited more government regulation:

 As a lifelong Texan and true believer in the importance of innovation and investment in our state’s strong and growing economy, I agreed to lead the TXU Corp. board of directors under the new ownership of the investors to help guide this transformation.

We understand that TXU plays an important role in the lives of many people, here in North Texas and across the state. And because of that, we have spent a great deal of time listening to the people we hope to serve.

We all agree: Corporate citizenship is not a gimmick, it’s a given. We practice Texas values because we value Texas. We live and work here, too. We want our policies to not only save dollars for our customers but also make sense for our communities. After all, being a good neighbor is good business.

Under our stewardship, the new TXU will not only talk the talk, we’ll walk the walk. We have asked the state regulatory agency, the Public Utility Commission of Texas, to hold us accountable for our commitments. The PUC has always had, and will continue to have, the power to regulate electric delivery rates in Texas, whether the commission is dealing with the old TXU or a new TXU.

That should make you laugh, because according to the Washington Post, KKR is in such a rush to do its IPO because it wants less government regulation and tax liability:

In the days leading up to the IPO, lawmakers proposed a slew of tax bills aimed at Blackstone and other big private-equity firms. These companies organize themselves as partnerships and pay taxes at the capital gains rate of 15 percent.

Bipartisan legislation proposed in Senate last month would force private-equity firms that sell shares to the public to pay at the 35 percent corporate tax rate.

Interesting. On one hand they are “inviting regulation” and on the other hand they’re trying to get out of paying more taxes. How amusing is that?