Friday Letter: Good targets

Even for a firm accustomed to the vicissitudes of private equity, this has been a tumultuous week for Kohlberg Kravis Roberts – and for big buyout firms in general.  

In the last seven days, the US firm has seen its prospective $100 billion global spending spree come under threat from all angles, with regulators, trade unions, recalcitrant shareholders and competitors all queuing up to take on the buyout giant.

KKR ended last week by pulling out of the £10 billion consortium bid for UK retailer Sainsbury’s, after disagreements over price and pension deficits. And although CVC still seemed to have stomach for a fight, it surprised few when it too finally capitulated. Over the weekend, a credible challenger emerged for Australia’s Coles Group, when local competitor Wesfarmers teamed up with private equity backers to trump KKR’s $16 billion bid for the retail chain.

Back in the UK this week, KKR had the dubious honour of becoming the latest target of the GMB (who had previously got their teeth into buyout group Permira), as the trade union railed at what it regarded as the excessive leverage employed in KKR’s £10.1 billion bid for health and beauty chain Alliance Boots.

Meanwhile in its US heartland, KKR is facing a shareholder lawsuit over its $29 billion bid for First Data, and its $45 billion joint bid for Texan utility TXU alongside TPG – potentially the largest buyout to date – could still be blocked by the state’s Public Utility Commission.

Of course, if you’re going to do $100 billion of deals in the space of a few months, it’s hard to escape being the centre of attention. And most of this opposition probably falls either into the category of being little more than nuisance value or the inevitable fallout from a combative bidding process. But nevertheless, it seems unlikely that anyone at the famously private and ferociously competitive KKR will particularly enjoy either the brickbats or rebuffals.

It’s clear that the freedom to buy companies away from the glare of public and regulatory scrutiny no longer exists at the larger end of the market. The deals now under consideration by the mega-funds are either so politically charged – like TXU – or for such well-known brand names – like Sainsbury’s – that they are bound to attract the attention of a much wider audience than previously.

Increasingly, though, this is not an issue whose impact is confined just to the buyout heavyweights. The general perception of private equity – not just among politicians and mainstream media but also among regulators and management teams – will inevitably be coloured by the highest profile deals. And the widely-held fear is that this could lead to detrimental changes to the tax or regulatory regime that would affect the whole industry. In practical terms, it will certainly make it harder for deals – and not just the biggest – to get done.

So the bigger firms, whether they like it or not, are going to have to be in the vanguard of the communications campaign that is only now stuttering into life.

There are definite signs of progress, however. This week KKR, which has already tried to pre-empt concerns about its TXU deal by enlisting the support of environmental groups, attempted to win the backing of trade unions by cancelling a previous subcontracting arrangement.

And in its statement withdrawing its Sainsbury’s bid on Tuesday, the CVC-led group delivered an unprecedented level of detail about its plans for the retailer post-buyout – a clear recognition of the need for financial buyers to evidence their genuine engagement with an acquired asset and to counter any accusations of brutal deconstruction post-purchase.

Private equity firms have always had a good answer to a failed buyout – move on to another one. Look at the Sainsbury consortium – KKR and TPG are pressing ahead with TXU (and others) while today (Friday) CVC has emerged as a leading suitor for Spanish tobacco company Altadis and Blackstone is reportedly circling US loans business Sallie Mae.

But this is not a long-term solution. The big buyout industry needs to proactively engage in and win the debate against its fiercest critics if it wants to spend its time buying good targets, rather than becoming one.