By Ryan Dezember
Private-equity firms are taking a liking to public stock.
The investment firms are increasingly taking buyers' stock,
rather than cash, for at least part of the price when they sell the
companies they own. While doing so can delay the return of cash to
clients, such as endowments and pension funds, firms that take
stock are betting they will reap greater profits over time.
Buyout firms accepted at least some stock in $96.9 billion of
announced company sales last year, the highest volume on record
and, at 26%, the largest percentage of deals since 2001, according
to data provider Dealogic. In 2013, $19.8 billion of deals, or 9%
of all private-equity sales, included stock as payment.
Buyout executives said corporate buyers allow them to bypass the
long process of unwinding investments through initial public
offerings while getting a piece of the possible upside of combining
companies, from greater purchasing power to consolidated sales
forces. But like IPOs, these deals come with the risk that the
shares could sink, denting returns.
For corporate buyers, using shares as currency often enables
them to borrow less to fund purchases, helping them keep debt
down.
Like its private-equity rivals, KKR & Co. has taken
advantage of a buoyant stock market and acquisitive corporations to
cash out of older investments. In several recent sales, the New
York firm has taken blocks of the buyers' stock.
In exchange for European pharmacy chain Alliance Boots GmbH,
cafeteria supplier US Foods Inc., artificial hip manufacturer
Biomet Inc. and Milk-Bone maker Big Heart Pet Brands, KKR and its
co-investors have agreed to take stakes in buyers Walgreen Co.,
Sysco Corp., Zimmer Holdings Inc. and J.M. Smucker Co.,
respectively. Those stakes range from 13% to 20%.
"These companies may be fully ready to go public, but we may not
be willing to exit at that point," said Alexander Navab, who heads
KKR's private-equity business in the Americas.
Each buyer's stock has risen since the deals were announced,
though three of the mergers haven't been completed. Shares of the
combined Walgreens Boots Alliance Inc. have more than doubled since
the U.S. pharmacy chain in 2012 announced a two-part deal to
acquire private-equity backed Alliance Boots for a mix of cash and
stock.
For KKR, the increase has meant a quadrupling of its investment,
on paper at least, up from double its money when the deal was
struck.
It doesn't always work out so well. In 2012, Riverstone Holdings
LLC and Carlyle Group LP sold Gulf of Mexico oil producer Dynamic
Offshore Resources LLC to SandRidge Energy Inc. for $680 million
and shares of the Oklahoma City energy explorer that were valued at
about $579 million at the time.
SandRidge has struggled with slumping oil and gas prices, and
its stock has fallen more than 70% since the deal was announced,
trimming the firms' gains to twice what they invested in Dynamic,
down from more than three times at the time the deal was struck. A
Riverstone spokesman declined to comment.
Despite SandRidge, "this strategy has worked well for us," said
Carlyle spokesman Chris Ullman, most recently when the firm last
year traded its stake in French cable operator Numericable Group SA
for stock in buyer Altice SA. When the Washington, D.C., firm sold
the Altice shares this month, their value had risen threefold.
Stock deals also can help safeguard the combined company's
financial health.
When Smucker this month agreed to buy Big Heart from KKR and two
smaller firms, it said it would pay with $1.3 billion in cash and
17.9 million of its own shares, a 14% stake, and take on about $2.6
billion of the pet food company's debt.
Moody's Investors Service, which is reviewing the pending
acquisition's effect on Smucker, said the added debt would lower
Smucker's credit rating no more than two notches, to Baa2, still
investment-grade territory, which keeps its borrowing costs low and
maintains its access to the short-term lending market.
The Orrville, Ohio, company said the deal's structure also frees
up cash to continue paying out dividends to shareholders.
Write to Ryan Dezember at ryan.dezember@wsj.com
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