Kravis Bolsters KKR’s Biggest Deal With First Data Capital Boost

Jun 19, 2014 12:45 pm ET

June 19 (Bloomberg) -- Henry Kravis won’t let his firm’s biggest investment slip away.

KKR & Co., run by Kravis and his cousin George Roberts, said today it led a $3.5 billion private placement for First Data Corp. to shore up the payment processor’s balance sheet and reduce interest payments, seven years after the New York-based private-equity firm and its clients loaded it with debt to fund a $27.5 billion buyout.

“First Data is and continues to be the largest investment that we’ve ever made,” Kravis said in a telephone interview today. “What we needed to do was to get capital raised so that we can give the company more running room.”

First Data has struggled with its $23 billion debt load, with annual interest expense consuming more than 75 percent of cash flow. The Atlanta-based company, which processes payments for retailers, financial institutions and credit-card issuers, was hit hard by the pullback in consumer spending during the recession, losing money each quarter since the buyout, according to data compiled by Bloomberg. KKR named Frank Bisignano, the former co-chief operating officer of JPMorgan Chase & Co., as First Data’s chief executive officer last year.

“We really believe in Frank and in the management team that he’s been able to put together,” Kravis said. More than 45 senior executives have joined the company under KKR’s ownership, he added.

Original Equity

KKR committed $1.2 billion of the new investment, providing $700 million from its balance sheet, according to a statement today. The firm’s 2006 buyout fund added an additional $500 million.

KKR’s original equity in the 2007 buyout was $6.4 billion, according to an October 2007 Moody’s Investors Service report. The private-equity firm also boosted the investment by $300 million last year.

Of the $3.5 billion capital announced today, $2 billion came from new investors, according to the statement. The equity injection “validates our transformation of this company and its tremendous growth opportunity,” Bisignano said in a phone interview, and reduces annual interest expense by $375 million.

First Data’s $2.5 billion of 11.75 percent notes due in 2021 rose 2.3 cents to 116 cents on the dollar at 11:09 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. That’s the highest price since the debt was issued in February.

Anticipated IPO

Bond investors earlier this year had anticipated an initial public offering, including Brian Gilbert, a money manager at Advisors Asset Management Inc. in Monument, Colorado, which oversees about $13 billion.

“It takes time to go through the motions of an IPO, and this could be a quicker solution,” he said in a phone interview today. The firm sold its First Data bonds earlier this year.

There’s no near-term need for an IPO, Kravis said, adding that the private placement took about a month-and-a-half and appetite among investors was high. KKR’s capital-markets arm was the sole placement agent.

“We had no gun to our head,” said Kravis. “This was fairly quick.”

Regardless of the choice to raise money privately rather than publicly, the capital injection is a significant positive, according to Gilbert. “It buys some time,” he said, to improve the company’s financials before again considering an IPO or sale to a strategic buyer.

Default Risk

A gauge of First Data’s default risk dropped to the lowest since June 2007. Credit-default swaps that investors use to protect against losses fell 70.5 basis points to 324 basis points, according to data provider CMA. The cost of the five- year contracts, which declines as investor confidence in the company’s creditworthiness improves, is equivalent to $324,000 annually to protect $10 million of debt.

First Data has undergone a shift in strategy under Bisignano, moving away from a sole focus on payment processing toward giving its clients tools for other parts of their businesses. The company has added cloud-based and mobile applications to its product offerings and in the past year gained customers abroad, including in Brazil, Bisignano said.

“Much of our products are not driven by whether the consumer spends more or doesn’t spend more,” said Kravis, who sits on First Data’s board of directors along with KKR executives Scott Nuttall and Tagar Olson.

Revenue at the company has grown from $9.3 billion in 2009 to $10.8 billion in 2013, Bloomberg data show. Operating profit has increased each year since 2009, while net income has been dragged down by interest costs.

Mixed Success

KKR has had mixed success turning around deals made from its 2006 buyout fund. The $17.6 billion fund invested in First Data as well as in Energy Future Holdings Corp., the Texas utility company bought by KKR, TPG Capital and Goldman Sachs Capital Partners for $48 billion in 2007, before natural-gas prices plummeted. The three firms and their co-investors will lose almost all of their $8.3 billion equity investment in Energy Future under proposals to restructure the company, which filed for bankruptcy protection in April.

The KKR fund, which has had an 8.5 percent annualized return after fees, has also had successes. Its investment in Dollar General Corp. returned more than 4.5 times its money, and its stake in hospital operator HCA Holdings Inc. is being carried at 4.5 times cost.

‘Highly Unusual’

KKR’s move to add to its First Data investment “is highly unusual,” Dave Novosel, a senior bond analyst at Gimme Credit LLC, said in a phone interview. “More often than not it’s companies pulling out than putting more money in. What makes it even more unusual is the amount: $3.5 billion is significant.”

The firm’s balance sheet helps. With $2.1 billion in cash at its own disposal as of March 31, KKR is rare among private- equity firms that can step into an investment with a significant amount of money coming from itself rather than relying on fund investors, Erik Gordon, a professor of business at the University of Michigan, said in an e-mail.

“Our balance sheet gives us that extra firepower,” Kravis said in an interview with Bloomberg News last month. “We can provide almost any kind of debt product that a company may need. We can provide equity, and we can take minority or majority positions in a company.”

--With assistance from David Carey in New York.