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20-06-2012 00:47:00

KKR's Shares Rally 7% after Partial Selldown on Alliance Boots

By Amy Or

NEW YORK--KKR & Co. (KKR) shares rallied 6.9% to $12.48 Tuesday after it announced a partial selldown of its stake in pharmacy-led health and beauty retailer Alliance Boots GmbH.

The rise was one of the largest one-day gains since KKR was listed on the New York stock exchange in July 2010.

U.S. drug-store retailer Walgreen Co. (WAG) said it will acquire a 45% stake in Alliance Boots in a $6.7 billion deal, allowing the famed buyout giant and two of its funds to profit handsomely on a prefinancial-crisis investment.

KKR bought Alliance Boots in 2007 in what was Europe's largest leveraged buyout at $2.45 billion. The investment returned a healthy 1.8 times KKR's original investment, in the form of cash and Walgreen shares.

But the benefit of the Alliance Boots windfall on individual funds is likely to be marred by market declines preceding the deal's announcement.

Goldman Sachs analyst Marc Irizarry said in a note Tuesday the gains are "likely somewhat offset by negative mark to market in the firm's private equity portfolio in the second quarter."

Continued turmoil over the European sovereign debt crisis and lingering concerns about slowing global growth have weighed on equity markets in the past two months. The Standard & Poor's 500 index has lost 3.6% so far this quarter, a far cry from the robust 17.7% gain in the first quarter.

While private companies often track public market movements, it is hard to gauge the extent of value depreciation among KKR's privately held portfolio companies, given variations on specific company fundamentals and, therefore, the impact on KKR funds' values.

Barclays PLC analysts, led by Roger Freeman, said this deal, together with a $566 million divestment from Dollar General Corp. (DG) shares earlier this month, "should go a long way towards enabling KKR to pay cash carry." Cash carry refers to a private equity firm's profits distributable to investors.

KKR's 2006 Fund (Overseas), which piggybacked on the fundraising success of the North America-focused 2006 Fund to raise money for overseas investments, is a major beneficiary of the Walgreen-Alliance Boots tie-up. It contributed about 60% of the capital for Alliance Boots, while the European Fund II put up $750 million and KKR $300 million of its own balance sheet for the deal.

The 2006 Fund is still suffering from markdowns on some investments made during the height of the subprime bubble. While the value of the fund as a whole was marked above cost, there were individual investments that were under water. The so-called "netting hole" has to be filled before fund investors can get cash profits.

The 2006 Fund was $125 million below cost, net of cash profits from sales or on other investments.

At the end of March, three of KKR's seven active private equity funds didn't generate cash carry upon exit on investments.

Executives said European Fund II, launched in 2005, and another fund that invested in Alliance Boots, was "marked just below cost."

As a firm, the Alliance Boots deal has a great bang for the buck for the private equity giant. KKR has put up $300 million of its own balance sheet in the Alliance Boots deal, meaning it will earn every cent of profit out of it.

Also, the deal and the option for Walgreen to buy the remainder of the company in about three years for approximately $9.5 billion in cash and stock excluded Alliance Boots' 25% minority interest in Swiss-listed health-care company Galenica, which now is worth over $1 billion at its current market price. KKR and Alliance Boots Chairman Stefano Pessina will now control the stake.

Write to Amy Or at amy.or@dowjones.com

(END) Dow Jones Newswires

June 19, 2012 18:47 ET (22:47 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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