Exam Number: F09018, F09112, F09058

Word Count: 2998

CRANFIELD SCHOOL OF MANAGEMENT

Full Time MBA Programme 2009/10

Term: 3

Part: 2

Integrating Finance and Business Management

(IFB)
KKR: How do they add value?

Group Report

This assessment/report is all my own work and conforms to the University’s 

regulations on plagiarism

An identical copy of this document has been submitted to the Turnitin system 
 Full Time MBA 2009/2010 IFB (Group Report)

Executive Summary 3

1. Introduction 4

2. Agents of Change 5

2.1 Investment approach 5

2.2 Sourcing Business Opportunities 6

2.3 Funding 6

2.4 Leverage 7

2.5 Joint Venture 7

2.6 Public companies 7

3. Value Creation by KKR 8

3.1 Value Creation process 8

3.2 Value Creation Strategies 8

3.2.1 Growth in earnings 9
3.2.2 Maximise Cash 10
3.2.3 Market Exit premium 10

5. Failure 12

6. Exit 13

7. Conclusion 13

Appendices 14

Appendix 1 KKR’s Guidelines for Responsible Investment 14

Appendix 2 KKR Active Private Equity Funds 15

Appendix 3 KKR’s Integrated Approach to Value Creation 16

Appendix 4 Boots Acquisition 17

Appendix 5 Tianrui Acquisition 18

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Executive Summary

Over the last three decades, KKR, a leading global alternative asset manager has made
significant accomplishments through its private equity investments. KKR has capitalised on
investment opportunities across the globe and has transformed $44.4bn investments in 1976
to $76.8bn in December 2008 by creating substantial value for the acquired businesses.

KKR has developed in depth industry knowledge and excellent relationships in both business
and political world to tap into businesses with leading market positions. KKR has acquired
businesses across a wide portfolio and unlike other PE firms, has followed an integrated
approach to every investment leveraging the collective insight and knowledge of all of its
executives. In addition to pension funds, loans and bonds, KKR puts its own money in each of
its investments and utilises the expertise of its in house consulting unit – Capstone, to
implement and drive operational improvements. Collaborating with the acquired firm’s
management team KKR’s senior advisors and Capstone group drive the value creation process
through a 100 day plan focusing on:
 Growth in earnings
 Cash maximization
 Market exit premium

Post acquisition, KKR’s integration process involves either retaining or replacing the
management team along with the addition of its senior advisors to the management board. On
occasions, it has also changed the organisation structure to align with the modified business
strategy. While KKR has been successful with most of its acquisitions, it has faced stiff
challenges in the form of management revolt, higher premiums, and inability to syndicate
loans resulting in failed acquisitions.

On the whole, KKR’s success over the years can be attributed to its flexibility, innovation and
emphasis on integrated value creation processes mostly. After having established itself in
developed economies, with its scale and reach, KKR is well positioned to dominate the PE
world in developing economies.

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1. Introduction

Established in 1976, KKR is a leading global alternative asset manager with landmark
achievements in private equity including the first leveraged buyout in excess of $1 billion, the
first friendly tender offer in the buyout of a public company, and the largest buyouts in the
U.S., the Netherlands, Denmark, India, Australia, Turkey, Singapore, and France1.

KKR’s Track Record From its Founding in 1976 to December 31 2008

All Funds Billions of Dollars

90
$76.80 bn
80

70

60
$44.40 bn
50
Amount Invested
40
Total Value
30

20

10

0
Increase in Value

Source: KKRAnnualReview2008

As shown in the graph, from 1976 to December 31 2008, KKR has increased the value of its
investments from $44.4bn to a staggering $76.8bn of which $60.1bn is realized and $17.7bn is
unrealized2.
The following sections of the report attempt to analyse KKR’s investment approach, industry
portfolio and exit strategies with special focus on its value creation logic. Covering a wide
range of investments from 2006 to 2008 across diverse portfolios, the report also highlights
innovative financial strategies that KKR has implemented and outlines underlying reasons why
few acquisitions have not been as successful.

1
http://kkr.client.shareholder.com/kpe/private_equity_overview.cfm
2
KKR Annual Review for the year 2008
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2. Agents of Change

2.1 Investment approach

Our research indicates that KKR typically deals with large and complex transactions. It believes
in acquiring industry leading companies across a wide portfolio of industries and works with
management to grow them into flourishing enterprises creating shareholder value [Appendix
1]. It is interesting to note that KKR puts its own capital at risk and partners with the
management team to implement strategic and operational changes to drive business growth3.

Industry Portfolio as of December 2008

1.30%
1%
2.50% 1.60% 0.10%
Healthcare
2.60%
Retail

18.70% Technology
5.40%
Financial Services
Manufacturing
7.20%
Media/Communications
Energy
8.10% 14.40% Telecom
Education
Recycling
11.80% Consumer Products
12.70% Chemicals

12.60% Transportation
Hotels/Leisure

Source: KKRAnnualReview2008

In general, as shown in the graph, KKR evaluates opportunities across a wide portfolio
including publicly listed companies, corporate business units, family owned businesses, etc and
invests in companies that are at a transaction point in their development. Henry Kravis (KKR’s
co-founder) states that “KKR is particularly effective in growing businesses with real potential

3
http://kkr.client.shareholder.com/kpe/private_equity_approach.cfm
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 Full Time MBA 2009/2010 IFB (Group Report)
and revitalizing companies facing change or transition because our focus is on long-term value
creation, not short term gain. In today’s economy, this approach is particularly important.”4

2.2 Sourcing Business Opportunities

KKR’s global network of business relationships and internal deal generation strategies is
arguably the most important source of their proprietary investments. KKR continues to
develop and leverage its deep expertise in 14 primary industry groups, long-lasting
relationships with business leaders world-wide and established strong relationships with
financial and government leaders to tap into potential opportunities.

2.3 Funding

Our research reveals that KKR has demonstrated extreme flexibility and adaptability in terms
of structuring the acquisitions.
On a broader level, as shown in Appendix2, KKR has distinct private equity funds which focus
on opportunities in diverse geographies. While KKR 2006 Fund invests primarily in North
American Businesses KKR Asian Fund focuses on Asian businesses and KKR European Fund III
and KKR E2 Investors invest across Europe. Typically these funds receive support from pension
funds, endowments, and foundations which provide the majority of the capital. More than 40
state and local public pension plans, representing more than 20 million members, have
committed nearly one-half of the capital raised for their funds.5
At the business level, whilst KKR’s preferred approach to acquisition seems to be teaming up
with other PE firms and investors, for instance:
 HCA (Hospital Corporation of America) in 2006 (KKR + Bain Capital partners + Merrill
Lynch PE group)6
 KION (MFG of Forklift trucks) in 2006 (KKR + Goldman Sachs Capital partners)7

It hasn’t hesitated to invest individually in some high growth potential businesses including
Aricent8 Technologies (India) in 2006 and First Data Corporation (US) in 20079.

4
http://kkr.client.shareholder.com/kpe/private_equity_overview.cfm
5
http://kkr.client.shareholder.com/kpe/private_equity_overview.cfm
6
http://in.reuters.com/article/idINIndia-42620220090922
7
http://www.kiongroup.com/en/main/kiongroup/kiongroup.html
8
http://www.vccircle.com/500/news/kkr-may-exit-it-solutions-firm-aricent-report
http://dealcurry.com/20090107-KKR-Wants-Out-Of-Aricent.htm
9
http://www.bloggingstocks.com/2007/04/01/kkr-and-first-data-why-a-payment-processor-is-
worth-26-billion/
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2.4 Leverage

Typically KKR’s acquisitions range in the upper market segment > $100mn and have been a mix
of equity, debt and bonds that would afford them a leading stake in the acquiring firm. For
instance KKR’s acquisition of First Data Corporation, USA in 2007 amounted to $29.5bn of
which $7bn is equity, $16bn by senior secured credit facilities, $5.5bn by unsecured notes and
$1bn by senior subordinate notes10.
KKR has also been innovative in deal structuring. For instance, in 2007 Yageo Corp Taiwan
raised new capital worth $230mn by issuing convertible bonds to KKR that were unsecured
zero coupon, zero yield, no put option and with a maturity of 7 years. In this completely new
business model, KKR did not insist on owning a controlling stake upfront because they believed
in Yageo’s business and trusted the management team11.

2.5 Joint Venture

It is also interesting to note that in emerging and developing eastern economies KKR has
adopted a joint venture approach against an acquisition. Our findings suggest that it is
primarily to comply with special investment regulations adopted by the local governments. For
instance the joint venture with Baoli by Kion which was acquired by KKR in 2006 demonstrates
KKR’s adaptability and its capability to expand globally.

2.6 Public companies

Another noteworthy aspect is that while acquiring public companies, KKR usually sets up a
special purpose company on the target company’s exchange so as to delist the target company
and transfer shares to the newly listed subsidiary. For instance, KKR set up Precision Capital
Private Ltd (PCPL) to acquire MMI Singapore in 200712.
On the whole, our analysis indicates that irrespective of the type and nature of the acquisition,
KKR is remarkably efficient and focused on the management teams of the target firm. While
KKR has retained the existing management team when confident of their capabilities, they
have also replaced the members when in doubt including the CEO in case of FDC in 200713.

10
http://www.sec.gov/Archives/edgar/data/883980/000104746907004668/a2178034zprem14a.ht
m#da77101_background_of_the_merger
11
http://english.cw.com.tw/article.do?action=show&id=3357
12
http://www.reuters.com/article/idUSSGC00068720070720
13
http://ir.firstdatacorp.com/releaseDetail.cfm?ReleaseID=265610

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3. Value Creation by KKR

KKR always has an integrated approach to investments. It undertakes operational and strategic
changes to drive value creation in companies selected in its portfolio after comprehensive due-
diligence [Appendix 3]. The various groups in KKR, the asset management team, capital market
team, capstone team, infrastructure team and Client and Partner group work together so that
the portfolio companies benefit from their combined experiences. Calling themselves as the
“big brain”, KKR in order to drive value creation always capitalises on its global reach and the
expertise of its professionals worldwide.
According to our research, KKR works closely with the management teams of the portfolio
companies to identifying new ways to improve companies in the long term and maximise
shareholder value2.

3.1 Value Creation process

The value creation is kicked off by the 100 day plan which is formulated by the management of
the portfolio companies in consultation with the Capstone team which lays out the key
objectives and priorities to achieve the investment goals initially established. During this time
functions encompassing sales and pricing practices, procurement and manufacturing
capabilities are closely reviewed. This helps the management team to focus on key operating
priorities, performance objectives for the first 24 months after KKR ownership. The
management of the portfolio companies have access to the talent management group of KKR
which helps them in recruiting key personals to achieve the set targets. The Portfolio
Management committee (PMC) continues to monitor these companies to compare and
contrast the company performance as well as the day to day activities along with financial
planning. Therefore KKR follows more of a hands-on approach in helping companies achieve
shareholder maximisation.

3.2 Value Creation Strategies

KKR works hand in hand with the current management to create value by employing various
methods to improve the growth in earnings, maximise cash and maximise exit premium with
its strong focus being operational efficiencies.

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3.2.1 Growth in earnings

KKR working along with the management of the various portfolio companies has implemented
various initiatives to achieve a stable growth in earnings. This involved realising cost savings,
increasing sales and having efficient procurement and supply chain practices. KKR has also
helped its portfolio companies in achieving the established targets by transferring skilled
executives to target companies. Few examples from our research for the above mentioned
initiatives are outlined below:

Effective cost control

KKR worked hand in hand with the Unisteel (a disk drive manufacturer which KKR acquired in
2008) management to devise a 100 day plan to maximise the performance of Unisteel after the
acquisition. The capstone team provided leadership to Unisteel in reducing its production costs
by helping them relocate production to lower cost countries in Asia. The Capstone team led a
complete review of the supply chain practices of Unisteel and was able to identify
opportunities for improvement such as having alternate supply options and having sourcing
costs aligned with the market conditions2. These initiatives launched by KKR have enabled
Unisteel to become a lean and responsive organisation.
Increased Sales
U.S Foodservice Inc (a broad line food distributor in the US which KKR acquired in 2007) with
the help of Capstone team in KKR was able to achieve substantial increase in sales as well as
market share. The Capstone team worked closely with the management team to identify the
most profitable segment which enabled them in formulating sales promotions targeting this
segment. They also helped the sales management to build a sales growth and effectiveness
programme to help sales force in acquiring new accounts2. All these initiatives have helped U.S
Foodservice in increasing its market share.

Transformation programmes
In Northgate Information Solutions Limited which KKR acquired in 2008, KKR helped the
management to design and launch a business transformation program to deliver cost
improvements, balance sheet and cash improvements. KKR helped the team to standardise
operational processes and programme management enabling Northgate to transfer delivery
hubs to low cost centres. By focussing on product profitability Northgate was able to
discontinue several product suites with low profitability enabling reallocation of sales
resources towards highly profitable products. The transformation programme also helped in

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implementing efficient procurement practices allowing further cost savings. One of the
executives of KKR joined Northgate to overlook successful implementation of the
transformation. In the first year because of the combined work of KKR and the management
team Northgate was able to realised 10% increase in revenues2.
Successful leadership
KKR helped First Data Corporation (a leading electronic payments and payment solution
company which KKR acquired in 2007) in putting together a senior management team well
versed in e-commerce to enable First Data in successfully adapting to change. KKR team
further advised First data in restructuring its business units and making it customer-
responsive. This restructuring helped First Data in centralising and streamlining its core
functions there by achieving cost reductions of 10%.While in the past First Data had always
relied on acquisitions as their growth strategy KKR was able to realise the competitive
advantage in investing in R&D for new product development. KKR experts helped the
management team in identifying areas for strategic focus which enabled them to develop
products in accordance with customer needs. GO-Tag™ was one such product with huge
potential. Therefore with KKR’s expertise and help First Data was able to achieve a revenue
growth of 5% and EBIT growth of 7% in the first year of acquisition2.

3.2.2 Maximise Cash

In order to maximise cash in the takeover company’s portfolio KKR has helped them in
effectively managing the working capital. For instance KKR brought into Laureate Education,
Inc, a leading international education provider its expertise in corporate finance to help
Laureate in improving cash management, treasury planning and cash repatriation. Moreover
KKR executives helped Laureate in implementing foreign exchange hedges to better manage
foreign currency exposure as its revenue is derived from 14 different currencies. This was of
immense help to Laureate as implementing hedges were not Laureate’s core competence!

3.2.3 Market Exit premium

In order for KKR to obtain an enhanced exit premium KKR has implemented initiatives to
ensure the growth of quality earnings. It was able to utilise its global network to enhance the
brand and reputation of its portfolio companies. KKR has always implemented effective
governance structures in the companies that it had taken over. The management team with
the help of KKR’s global network has been able to create scale economies for their employers
thereby making these companies all the more attractive to buyers.

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Unisteel using KKR’s expertise was able to develop a performance management system to
track ongoing performance and productivity improvement2 which would further accentuate
company value in the long run.
KKR assisted Laureate Education to make strategic acquisitions in order to achieve economies
of scale2. This further increased the market attractiveness of Laureate providing KKR with a
greater premium when it plans to exit this investment.
KKR was instrumental in creating a common culture2 across different business units of Nielsen
Company (an information company providing marketing and media measurement information
which KKR acquired in 2006). This has helped the various departments to work together more
efficiently to provide the much needed integrated solutions to the customer thereby building a
strong customer base.
Therefore, from our research it can be concluded that KKR has been a private equity company
that takes an integrated approach to value creation. KKR leverages on the knowledge and
experience of its global network of executives to drive value creation in its portfolio
companies.

4. Integration
Based on our research, the following integration strategies are adopted by KKR to maximise
the value of its acquisitions.

4.1 Keep the original management team unchanged

KKR has kept the original management team unchanged in many of the takeovers (Yageo
Taiwan, MMI Singapore, Unisteel Singapore and Seven Media Australia) which can be
attributed to KKR’s trust of the competence of the existing teams. This also gives KKR the best
competitive advantage to stabilise the acquisition and then further to add value to it by
introducing its own management expertise.
4.2 Brought in New Management team
In those highly mature financial markets, especially in EU and US, KKR normally brought in new
management team and then delist the company from the stock market (First Data Corporation
US, Aricent Technologies US, Harmann US and Northgate UK). It usually maintains the acquired
company on the stock market in an unfledged financial market (Yageo Taiwan).

4.3 Complete change to the organisational structure

Though not happening often, KKR do sometimes completely changes the organisation
structure of the acquired company. One typical example is EFH (Energy Future Holdings, US)

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which composes of three different subsidiaries. The entire organisational structure was
changed after KKR acquired it14, ranging from the update of the software system, changes to
its suppliers and vendors to the complete change of the management teams.

5. Failure

We must admit that KKR is very successful in most of its acquisitions. However, our research
also reveals some failures. We classified the failures into the following categories.

5.1 Inability to syndicate the loans

The acquisition of Alliance boots – the largest private equity buyout ever seen in Europe and
the first take-private acquisition for a FTSE 100 company – had been seen as a bellwether of
investor sentiment for buyouts across Europe. Unfortunately, due to KKR’s failure to sell even
the smallest portion of debt backing its acquisition15, KKR has not made the acquisition a 100%
successful deal (Appendix 4).

5.2 Incompatibility with local management style (Appendix 5)

This was observed in KKR’s acquisitions in Asia countries. Tianrui Cement China is a very typical
example.
In this purchase KKR has a minority stake of 43.2% stake with a veto right. But the relationship
between the local management head and KKR has gradually deteriorated after the acquisition
due to different interests of the business growth strategy, the priority of the company and the
conflict between different management styles, which is the root cause.
This ultimately led to the ousting of the CEO and chairman appointed by KKR by the local head.
So KKR is faced with huge challenges in taking this deal forward.

5.3 Too drastic changes to the original organisational structure

As mentioned above, KKR completely changed the organisational structure of EFH14 after the
acquisition. But the change did not bring the expected synergy. Despite the growth of revenue,
the cash flows on which PE deals are mostly based started lagging from 2009.
Some may argue that the special industry which EFH is in (energy industry) also contributes to
the unsatisfying result because of the falling of energy prices. However, our research shows
that other energy companies are up shooting in the same time period. Thus, we mainly

14
http://www.clean-coal.info/drupal/TXU_buyout_finalized
15
http://business.timesonline.co.uk/tol/business/industry_sectors/health/article2195771.ece

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attribute the unsatisfying result to the drastic changes to the organisational structure. EFH
needs some time to fit the new organisational structure into the company before making it
work well to drive for new growth.

6. Exit

In the investment portfolio of KKR (2006-2008) we researched, not many companies have
resorted to an exit strategy yet. But for the few to-exit companies or exited companies, IPO
seems to be the main choice although our retrospective research also reveals that KKR also
adopted other exit strategies such as management buyout and trading.
NXP and the Nielsen Company, which were acquired by KKR in 2006, are starting to look for an
exit by offering an IPO in 2010. NXP is targeting an IPO up to $1.15 billion while the latter
claimed to raise as much as $1.75 billion.
Dollar General US was acquired by KKR in 2007 at a price of $6.9 billion and KKR brought it to
public just two years later on November 13th in 2009 with an actual IPO of $716 million by
offering 34.1 million shares at $21 (the low end of its targeted $21-$23 range).

7. Conclusion

In conclusion, our research albeit limited from 2006 – 2008, reveals that KKR follows an
integrated approach to value creation in majority of its acquisitions. With in-depth knowledge
of industry and functional expertise from in house consultants - Capstone, KKR partners with
the acquired management team to implement change initiatives and drive long term business
growth.

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Appendices

Appendix 1 KKR’s Guidelines for Responsible Investment

Consistent with KKR’s incorporation of regulatory and stakeholder management into its
investment process, the firm worked with other members of the Private Equity Council (PEC)
to craft industry investment guidelines regarding ESG matters. In accordance with these guide-
lines, KKR will:

1. Consider environmental, public health, safety and social issues associated with target
companies when evaluating whether to invest in a particular company or entity, as well
as during the period of ownership.
2. Seek to be accessible to, and engage with, relevant stakeholders either directly or
through representatives of portfolio companies, as appropriate.
3. Seek to grow and improve the companies in which they invest for long-term
sustainability and to benefit multiple stakeholders, including on environmental, social
and governance issues. To that end, PEC members will work through appropriate
governance structures (e.g., board of directors) with portfolio companies with respect
to environmental, public health, safety and social issues, with the goal of improving
performance and minimizing adverse impacts in these areas.
4. Seek to use governance structures that provide appropriate levels of oversight in the
areas of audit, risk management and potential conflicts of interest and to implement
compensation and other policies that align the interests of owners and management.
5. Remain committed to compliance with applicable national, state and local labor laws
in the countries in which they invest; support the payment of competitive wages and
benefits to employees; provide a safe and healthy workplace in conformance with
national and local law; and, consistent with applicable law, will respect the rights of
employees to decide whether or not to join a union and engage in collective
bargaining.
6. Maintain strict policies that prohibit bribery and other improper payments to public
officials consistent with the U.S. Foreign Corrupt Practices Act, similar laws in other
countries and the OECD Anti-Bribery Convention.
7. Respect the human rights of those affected by their investment activities and seek to
confirm that their investments do not flow to companies that utilize child or forced
labor or maintain discriminatory policies.
8. Provide timely information to their limited partners on the matters addressed herein,
and work to foster transparency about their activities.
9. Encourage their portfolio companies to advance these same principles in a way which
is consistent with their fiduciary duties.

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Appendix 2 KKR Active Private Equity Funds

KKR 2006 Fund

Vintage: 2006

Geographic Focus: Invests principally in North American businesses.

Strategy: Focuses primarily on control transactions of industry-

leading businesses.

KKR Asian Fund

Vintage: 2007

Geographic Focus: Invests in Asian businesses with its main focus in Greater
China, Japan, and Australia.

Strategy: Focuses primarily on control transactions of industry-

leading businesses.

KKR European Fund III

Vintage: 2008

Geographic Focus: Invests across Europe with its main focus in Western
Europe including Germany, France, Scandinavia, the
Netherlands, the UK and Southern Europe.

Strategy: Focuses primarily on control transactions of industry-

leading businesses.

KKR E2 Investors

Vintage: 2009

Geographic Focus: Invests across Europe with its main focus in Western
Europe including Germany, France, Scandinavia, the
Netherlands, the UK and Southern Europe.

Strategy: Focuses primarily on additional capital infusions in

portfolio companies of KKR European Fund II.

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Appendix 3 KKR’s Integrated Approach to Value Creation

At KKR, we are working to build a business that is unique. Our vision is that any investment we
make in any business anywhere in the world benefits from the collective knowledge, insight
and experience of all of our executives globally.
Most asset management firms operate in silos. They add products that they believe they can
sell and their investing process for new products often does not benefit from interaction with
other investing teams. At KKR we are different.
We only want to build businesses that we can make special. Our experience investing globally
across industries and cycles makes us unique, as do the the longevity of our investment teams
and tenure of our senior management.
We view KKR as an institution that has a “big brain” that we can access, as appropriate, to
make informed investing decisions across the capital structure, asset classes and geographies.
We are building businesses that are completely integrated and have access to the entire firm
to inform market assessments and investing decisions.

Source: http://kkr.client.shareholder.com/kpe/private_equity_overview.cfm

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Appendix 4 Boots Acquisition

Extract from “KKR unable to sell any debt for its £9bn Alliance Boots acquisition”
August 4, 2007, The Times.
Although KKR’s deal to acquire Boots is not in any doubt, its failure to syndicate the loans has
sent shock-waves through the market. The three banks backing the deal had already been
forced to cancel the syndication of the senior debt portion, amounting to well over £5 billion,
after nervous investors balked at it. That left the banks with just two smaller portions of debt,
which they had planned to sell at discounted rates to investors.
However, a source yesterday confirmed that Deutsche Bank, JPMorgan and UniCredit had also
shelved the sale of the £1 billion junior loan after investors refused to buy in. Although
technically the remaining £750 million loan note is still available for syndication, the source
said that it was likely that it would also be pulled.
A spokesman for Alliance Boots said: “We were fortunate in that we secured the money before
the turmoil in the credit markets started to affect the overall situation. Our financial position is
strong and is unaffected by this turn of events.”
The Boots woes added to a string of failed or cancelled debt sales backing private equity deals
as knock-on effects of the sub-prime crisis take their toll. Last week Cadbury Schweppes
postponed the sale of its American drinks division, citing “extreme volatility” in debt markets.
The $23 billion sale of Virgin Media has effectively been put on hold as banks refuse to
underwrite new deals until their backlog of unsyndicated loans is cleared. A string of other
debt deals, including the financing of the Saga/AA merger, have been put on hold.
Dealogic, the financial data provider, said this week that there was as much as £250 billion of
corporate and private equity leveraged loans still to complete syndication in Europe and the
United States.
That means that the biggest lenders, JPMorgan, Deutsche Bank, Citigroup, RBS and Barclays,
will be forced to keep the loans on their balance sheets until the markets have calmed down
enough for them to try to sell the debt on. In the best-case scenario, that will start to happen
in September, when everyone has returned from the August holiday period. Many bankers are,
however, starting to fear that the backlog could take much longer to clear, perhaps into next
year.
Source:
http://business.timesonline.co.uk/tol/business/industry_sectors/health/article2195771.ece

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Appendix 5 Tianrui Acquisition

Tianrui: Incompatible management style with KKR

Tianrui is one of top 10 cement manufacturers of China.

This deal is of a different nature compared to the normal deal where KKR usually has a
controlling stake. In this purchase KKR has a minority stake but it was able to negotiate veto
rights over key decisions like incurring more debt or acquisitions that are not profitable in the
long term. KKR has a 43.2% stake in the company.

This deal was one of the innovative Private equity deal involving World Bank’s investment arm,
JP Morgan and some Chinese banks. This deal provided long term loans amounting to $450mn
to Tianrui for future growth and capacity expansion. Titan Cement Limited, an entity controlled
by affiliates of KKR put in $115 million. In connection with KKR’s investment, Tianrui Cement
also received loans from the International Finance Corporation and an international banking
syndicate led by JPMorgan for an additional US$335 million for a period of five years. It is a
Yuan denominated loan involving Chinese banks. This was aimed primarily towards
consolidation of the fragmented Chinese cement industry by getting sufficient finance to
pursue acquisition. This loan was used to refinance the existing short term bilateral loans. In
this deal KKR was pursuing a less aggressive buy out due to government sensitivity as well as
dominance of family controlled enterprises.

Even though Tianrui maintains that it has become more profitable, there is not enough data in
the public domains to fully justify its position. Operating profits seemed to have increased by
60%. Company has also made three strategic acquisitions after the deal. But relationships
between the founder and chairman of the group, Li Luifa and the foreign investors have
deteriorated. There have been disputes between Li Liufa and the outside investors along with
the top management of the cement company on Li Liufa’s management practices and
commingling of money between different businesses owned by the group. This ultimately led
to the ousting of the CEO and Chairman of the cement company by Li Luifa. KKR is faced with
umpteen challenges in taking this deal forward. The company is currently run by close
associate of Li Liufa without taking into consideration the long term goals of establishing
performance indicators, strengthening financial management which could be achieved with
the help of KKR. Tianrui being a family concern makes it even more difficult to bring in a

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 Full Time MBA 2009/2010 IFB (Group Report)
professional management team. Also as the group has several business interests not just the
cement business in which KKR has a stake makes the entire deal more complex. It is in the
interest of both the parties to see the deal through due to the cost implications.
Source:
http://www.kkr.com/releasedetail.cfm?ReleaseID=333004&KeepThis=true&TB_iframe=true&hei
ght=461&width=592

http://www.alacrastore.com/deal-snapshot/Titan_Cement_Co_SA_acquires_Adocim_Cimento-
513297

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