Updated from 5:41 p.m. ET to include comments from Leon Cooperman of Omega Advisors.
NEW YORK (TheStreet) -- Private equity giant KKR & Co. (KKR - Get Report) is buying its publicly traded specialty finance arm KKR Financial (KFN) in a $2.6 billion all-stock transaction that the Henry Kravis and George Roberts-run company says will boost its earnings per share.
Shareholders of KKR Financial will receive 0.51 common units of KKR for each common share they own, valuing the company at $12.79 a share based on Monday closing prices. The deal implies a 35% premium to the Monday closing price of KKR Financial, KKR said in a statement.
KKR Financial shares were rising over 30% to $12.43 in after-hours trading. KKR shares were trading lower by just over 1% to $24.80.
"The deal makes sense. The price is fair. We own KKR and KFN and look forward to owning more KKR," Leon Cooperman, head of hedge fund Omega Advisors, said in an e-mail to TheStreet.
Omega Advisors is the second largest shareholder of KKR Financial, with an over 7% stake in the company's shares according to quarterly Securities and Exchange Commission filings as of Sept. 30. Omega also is an investor in KKR shares with an over 1% stake, the filings show.
KKR Financial has a $2.9 billion portfolio that is invested in collateralized loan obligations, special situations investments and traditional private equity. The merger is expected to combine complimentary investment portfolios, make use of KKR Financial's fully invested funds and improve the overall entity's financial structure.
"The acquisition of KFN will accelerate the diversification of KKR's balance sheet holdings, in addition to increasing their liquidity and yield profile," KKR said. The company also highlighted that it will preserve KKR Financial's funding structure, including $1 billion of long-term, largely fixed-rate debt and perpetual preferred securities, which will remain obligations of KFN without recourse to any other KKR entity.
Overall, the deal is expected to improve KKR's distributable earnings per share, the company's preferred earnings metric. KKR calculates that after the acquisition, its book value per share will rise 13% to $11.34 a share.
"Through this transaction, we are acquiring a business with a fully invested, complementary portfolio of assets while increasing the scale and diversity of KKR's balance sheet. Furthermore, through the distribution of KFN's realized earnings, the transaction is expected to provide a meaningfully greater recurring component to KKR's distribution and also be immediately accretive on a total distribution per unit basis," Henry Kravis and George Roberts, co-chairmen and co-chief executive officers of KKR, said in a joint statement.
KKR and KFN's boards of directors have both approved the transaction, which is expected to close in the first half of 2014, according to a statement.
Goldman Sachs and Simpson Thacher & Bartlett are representing KKR, and Lazard and Cravath Swaine & Moore are serving as independent financial and legal advisors to the independent directors of KKR.
Sandler O'Neill & Partners and Wachtell, Lipton, Rosen & Katz are serving as independent financial and legal advisors to the independent committee of the KKR Financial's board of directors.
-- Written by Antoine Gara in New York.