WSJ UPDATE: KKR Earnings Beat Expectations as Some LBOs Pay Off
07/27/2012| 04:52pm US/Eastern
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By Ryan Dezember
Challenging the view that big deals from the leveraged-buyout boom are destined to be money losers, KKR & Co. (>> KKR & Co. L.P.) Friday reported gains from some of those 2006 and 2007 investments to beat expectations for the private-equity firm's quarterly results.
"We have been saying for the last several years to our investors that we actually feel quite good about the investments that we made in the 2006 and 2007 period," Scott Nuttall, KKR's head of global capital and asset management, said Friday on a call to discuss the firm's second-quarter results.
KKR reaped profits from stock offerings of Dollar General Corp. and Nielsen Holdings NV during the quarter. KKR has seen the value of its Dollar General buyout, made in 2007, rise sixfold while its 2006 Nielsen investment is up 73%, the firm said.
The Dollar General and Nielsen stock sales, along with proceeds from closing out investments in oil-and-gas explorer Hilcorp Energy Co. and a joint-venture with pipeline operator El Paso Corp., contributed 6 cents to KKR's 13-cent-per-share payout for the quarter. The remainder came from fee-related earnings.
Under generally accepted accounting principles, KKR's second-quarter profit more than tripled, rising to $146.3 million, or 58 cents a share up from $39.6 million, or 18 cents per share, the year before.
Using the economic net income metric private-equity firms favor, earnings rose 73% to $546.1 million, or 74 cents per share. Economic net income gauges performance and the value of private-equity investments, counting both realized and unrealized gains as well as accounting for the big employee payouts that occur when partnerships transform themselves into public companies.
Meanwhile, KKR's distributable earnings - profits that can be paid out to public shareholders -- nearly tripled, rising to $406.1 million, the highest amount since KKR became a publicly traded company. Of that, $104 million will be paid out to investors while the remainder was earned through KKR's own investments and will be retained for the business.
KKR shares closed up 3 cents to $14.28.
Another deal struck during the quarter involving a 2007 buyout is also expected to yield a big payout for investors. KKR agreed to sell a 45% interest European pharmacy giant Alliance Boots GmbH to Walgreen Co. for $6.7 billion. The sale will allow KKR to nearly double the value of its investment in Alliance Boots and will yield a 10-cent-per-share distribution once the deal closes, said Chief Financial Officer William Janetschek. Analysts expect the deal to close during the current quarter.
To be sure, KKR has work to do to avoid losses on some of its buyouts from the boom period, an era famous for large deals that heaped debt on companies as they came under private ownership. KKR has the value of its investment in power producer Energy Future Holdings Corp., formerly known as TXU, at five cents for every dollar invested. KKR acquired TXU in 2007 with private-equity firm TPG and the private-equity arm of Goldman Sachs Group Inc. for $31.8 billion in the largest leveraged buyout on record.
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