A plan by Kohlberg Kravis Roberts to acquire an affiliate has encountered opposition from a group that advises investors.
K.K.R., the giant private equity firm, agreed last year to acquire KKR Financial Holdings, an affiliated specialty finance company that invests in credit, for $2.6 billion in stock, saying the deal would help it expand its balance sheet. KKR Financial Holdings, known as KFN, is an independent, publicly traded company that is managed by a subsidiary of K.K.R.
But on Monday, the CtW Investment Group, an organization that advises union pension funds, is expected to oppose the deal, arguing that it would shortchange shareholders.
CtW contends that the acquisition process was flawed, leading to a price that was too low, according to a letter it plans to send to shareholders. The letter, which was obtained by DealBook, urges shareholders to vote against the deal at a meeting on April 30.
The views of CtW may not carry much weight, since the group advises investors that hold a little more than 0.1 percent of the shares of KKR Financial Holdings. Two influential shareholder advisory groups, Institutional Shareholder Services and Glass Lewis, have come out in support of the deal, though both groups expressed concerns about the apparent lack of a competitive sale process.
A spokeswoman for K.K.R. declined to comment on CtW’s letter.
In December, K.K.R. agreed to pay 0.51 of a K.K.R. share for each share of KKR Financial Holdings, valuing those shares at $12.79 each, a premium of about 35 percent.
In its letter, CtW argues that the board of KKR Financial has “close ties†to K.K.R., preventing it from reaching a fair deal. The chief executive of KKR Financial, Craig J. Farr, who is also the head of KKR Asset Management, a K.K.R. subsidiary, sits on the board, as does Scott C. Nuttall, the head of K.K.R.’s global capital and asset management group.
“This deal’s low valuation and lackluster negotiation process further demonstrate that KFN’s directors failed to discharge their fiduciary duties and adequately negotiate on behalf of KFN’s public shareholders,†the letter states. It is signed by Dieter Waizenegger, CtW’s executive director.
To support its contention that the shareholders received a bad deal, CtW notes that the acquisition was struck at a time when KKR Financial shares were near their lowest point for the year and shares of K.K.R. were at their high. Since the deal was announced, CtW notes, K.K.R. shares have fallen, diminishing the deal’s implied price.
In addition, the letter says that the “KFN board of directors appears to have made no effort to pursue alternatives or solicit competing bids,†and that any rivals would have faced significant obstacles.
“The board’s decision to forgo an auction process is a cause for concern because shareholders have little assurance that the offer price reflects the true, fair value of the company’s assets,†the letter states, adding later that the board is “acting as an agent of K.K.R. rather than its own shareholders.â€
Those criticisms echo concerns voiced recently by I.S.S., which said in its report on the deal that K.K.R.’s management of KKR Financial created a possible conflict of interest. I.S.S. also pointed to the “unusually high†termination fee of 9.6 percent as a cause for concern.
Glass Lewis also said it was concerned that KKR Financial “does not appear to have solicited or engaged any alternative parties prior to executing the merger agreement.â€
But both I.S.S. and Glass Lewis concluded that, in spite of these concerns, the deal’s price was adequate and that KKR Financial shareholders would benefit from owning part of K.K.R.
One large shareholder is enthusiastically in favor of the combination. Leon G. Cooperman, the head of Omega Advisors, which owns more than 7 percent of KKR Financial shares, said on a conference call in December that the merger made “eminent sense†and that the price was “fair.â€
“I recommended this two years ago,†he said, according to a transcript. “But better late than never.â€
