It’s always slightly disconcerting to find yourself sharing a beat with the UK’s Daily Mail, which this week has turned its eye on private capital dealmaking via the colourfully headlined ‘Pandemic predators’ £52bn raid on UK firms’.
So, it’s only fitting that we turn our attention to one of the UK’s most recent take-private deals: KKR’s £2 billion ($2.8 billion; €2.3 billion) offer to buy developer John Laing. You can read about the nuts and bolts of the deal here, but the key takeaway is that this may actually be a rare ‘win-win’ – for the most part, at least.
It’s no secret John Laing’s “shares have underperformed and are cheap relative to similar companies”, as Liberum analyst Joe Brent told the Financial Times earlier this month. It’s also fair to say the company had long chafed against the constraints of being listed. Sources familiar with the firm noted getting funding for new projects could involve tricky decisions, such as disposing of perfectly good assets. That would often make larger projects off-limits, while expansion to new markets, like Latin America, could jitter public investors.
Under KKR’s open-ended Diversified Core Infrastructure Fund, whose model and cost of capital are better suited to long-term asset ownership, John Laing’s development team can certainly breathe easier. Chief executive Ben Loomes and his management team, which are expected to stay on board, can also take comfort that their strategy has been vindicated, just not by the public markets.
KKR, for its part, gains some welcome core infrastructure chops for its new open-ended strategy. After all, John Laing is a public-private partnership pioneer (its first such investment was done in 1990) with lots of greenfield experience. It also gets a strong, diversified portfolio of projects, which it is sharing with UK manager Equitix. Core and super-core vehicles can sometimes feel a bit like an exercise in branding, created for GPs to offload the projects they can no longer convincingly fit into their flagships. With the John Laing acquisition, KKR shows it is serious about the core space.
Of course, it’s not all upside. John Laing did, after all, get acquired on the cheap – and while management will be retained, it’s still unclear what kind of job cuts will follow. Cheap doesn’t mean costless, though, with KKR spending upwards of £200 million over the next 18 months just to top up John Laing’s pension fund (the cause of many a headache under Henderson ownership).
You can also question how accretive the John Laing team will actually be. Governments around the world may be looking at infrastructure to kick-start their economies post-covid, but it’s not entirely clear they will turn to PPPs for that, especially in places like the US, where John Laing is placing a good chunk of its deal hopes. While the company had been expanding into “adjacent greenfield projects”, its forays outside the PPP tent have not been unqualified successes. After getting burned investing in Australian renewables, John Laing decided to abandon the sector, which KKR sees as a big part of its core fund. And while the firm has started investing in digital infrastructure, it is a latecomer to the space.
In the end, Equitix might be the most straightforward winner here, getting a 50 percent stake, at an attractive price, in a portfolio of projects which is very much in its wheelhouse.
Still, you’ve got to appreciate KKR’s game plan. In just a few years, it has catapulted its flagship funds into the big league (its latest is targeting $12 billion); successfully established itself in Asia, where it raised the region’s largest infrastructure fund; and added a new core line of business.
While it’s currently sitting at number five in our Infrastructure Investor 50 ranking of the world’s largest equity GPs, we have a feeling it might soon be headed up the list.
Zak Bentley contributed reporting.