TXU courtship stirs investor's memories
By Elvia Aguilar Caller-Times
May 13, 2007
Local investor and entrepreneur Mel Klein looks at the largest proposed leveraged buyout in history with the practiced eye of an insider.
He knows that with the strength of the current financial market, buyouts of giant companies such as TXU will continue.
Kohlberg Kravis Roberts (KKR), a private equity firm that has completed record buyouts and transactions, and TPG, another private equity firm, are pursuing purchase of TXU for a record $45 billion. Klein calls KKR "dean of the leveraged buyout business." Many an analyst would say the same, but his insight is personal. In 1976, over dinner at Rose & Joe's Italian Bakery in New York, Henry Kravis invited Klein to become a partner in KKR. They've kept in touch in the intervening years.
The present buyout bonanza is a convergence of a number of factors, Klein said.
"It's an extraordinary time in the financial history of the world. There is tremendous liquidity. There is a lot of money all around the world and relatively low interest rates," he said. "Private equity firms have been quite successful with a good return on their investments so people are eager to invest in them.
"Effectively, almost every public company is for sale."
For months and years now, people have been waiting for this cycle to end, but it hasn't happened, Klein said.
"There has been terrorist action, interest rates moving up significantly, a slowing housing economy and other factors, but it hasn't stopped the financial markets," he said. "In fact, the market is at record highs. Things are going well with the market."
Klein and H. Swint Friday, associate professor of finance at Texas A&M University-Corpus Christi, said leveraged buyouts are extremely profitable for investment bankers as well as company managers and CEOs.
"Some of these people think the valuation of their stock and company is below where it should be," Friday said. "They do their best to maximize the value of the company, but sometimes managers recognize a value that Wall Street does not see. The job of the investment banker is to find these under-valued companies and find investors to buy them. If they obtain cooperation from senior management and make an offer that no one can top, they buy it. "
Friday said one of the primary benefits of a private equity leveraged buyout for a company is that company officials no longer have to answer to the shareholders.
"They can take the company private and no longer have to do the annual reports and don't have to answer to the public about quarterly earnings," Friday said. "The thing with management and stakeholders is that everyone works in their own best interest, so you do have to wonder if sometimes these managers intentionally bring down the value of a company for their own financial gain."
The future of leveraged buyouts can be unlimited because the size and scale have grown exponentially in recent times, Klein said.
"If they continue to work, there's no reason why they shouldn't continue," he said. "If some start to have problems that may require some changes in certain ways, that doesn't mean that legislation won't alter some aspects of the way these deals operate. But I don't see anything on the horizon that would significantly impact the way these companies do business or change the financial landscape."
And just because the company goes private, doesn't mean it can't go public again.
"Investors buy these undervalued companies to make money and then as soon as they can, they will sell it or bring it back public," Klein said.
Looking back on that day 31 years ago when he was invited to join KKR, Klein realizes how his life would've been much different had he accepted. But the reason he said no - his wife Annette of 31 years - was well worth it.
"It was a five-hour dinner and Henry and I agreed on everything except where I would be living," Klein said. "I had just asked Annette to marry me and I had agreed to stay with her here in Corpus Christi."
Jerome Kohlberg, Jr., and cousins Henry Kravis and George R. Roberts, former Bear Stearns employees, founded KKR later that year. They had met Klein as a young investor on Wall Street during his tenure at Donaldson, Lufkin & Jenrette, an investment bank founded by William H. Donaldson, Dan Lufkin and Richard Jenrette in 1959. Klein and the KKR founders are among the pioneers of leveraged buyouts and private equity funds.
Klein went on to create his own list of accomplishments as founder of Melvyn N. Klein Interests, managing general partner of GKH Partners and president of JAKK Holding Corp.
"No, I don't regret it," he said of not joining KKR. "Had I done it, I would've spent all my time dealing with some of the issues that I imagine Henry and the others are having to go through. On some levels, it would've been nice, but it has been a wonderful 31 years with my wife."
The most recent action on the KKR and TPG transaction includes filing to the Public Utility Commission, Texas' public utilities regulator, detailing plans for TXU if the takeover deal goes ahead. KKR has completed more than 150 transactions with an enterprise value of more than $279 billion. As of Dec. 31, KKR's equity investments were valued at more than $74 billion on more than $30 billion of invested capital.
TXU's reputation has suffered in recent months, before and after the buyout offer was announced. Its plans to build new coal-fired plants, before the buyout proposal was known, had the backing of the governor but attracted opposition from disparate groups including environmentalists, business leaders and officials in major Texas cities. State investigators recently accused the company of manipulating prices upward during the summer of 2005, prompting legislators to call for stricter regulation of the electric market.
KKR, meanwhile, said many of the things that TXU's detractors - from the floor of the Legislature to the city halls of those major cities - wanted to hear. KKR promised a drastic cut in the coal expansion plan - from 11 plants to three - and more emphasis on clean, renewable sources. When TXU sought to use its generating capacity as leverage against the state's investigation, KKR repudiated it and TXU quickly backed down, saying it was a misunderstanding.
Klein said KKR is the perfect company to take over TXU.
"Henry Kravis is a man of tremendous integrity, ability and a person with outstanding values," Klein said. "These are people driven to apply the highest standards to everything they do and they do these things well. Putting aside financial success, I have respect for them as people and for maintaining their high standards and maintaining them all these years."
Klein said BECAUSE Kravis is from Tulsa, Okla., and Roberts is from Houston, the two partners have an understanding of the Southwest and probably have researched TXU thoroughly.
KKR has offices in New York, Menlo Park, London, Paris, Hong Kong, and Tokyo.
Leveraged buyout:
The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
Source: Investopedia.com
Some of KKR's largest leveraged buyouts
# The first billion-dollar buyout transaction, Wometco Enterprises, 1984
# Several of the largest global buyout transactions, HCA, 2006 for $33B;
Capmark, 2006 for $16.7B;
SunGard, 2005 for $12B;
RJR Nabisco, 1989 for $31.4B;
Beatrice, 1986 for $8.7B
# The first buyout of a public company by tender offer, Malone & Hyde, 1984
# The largest leveraged buyout in Singapore, Avago Technologies, Inc., 2005, $2.8B
# The largest leveraged buyout in India, Aricent, 2006, $900 million
Source: KKR.com
Contact Elvia Aguilar at 886-3678 or aguilare@ caller.com.
