This is What Has KKR Financial Holdings (KFN) Spiking Today

NEW YORK (TheStreet) -- KKR Financial Holdings (KFN), otherwise referred to as KFN, spiked 28.6% to $12.15 during Tuesday's trading session. A day earlier, its former parent company KKR & Co (KKR) announced it would acquire KFN for $2.6 billion.

The stock-for-stock acquisition will see shareholders receive 0.51 common units of KKR for each share of KFN owned. At $12.79 a share, or $2.6 billion for all shares outstanding, this puts the deal at a 35% premium to KFN's Monday close of $9.45 a share.

KFN, a specialty finance firm dealing in corporate and leveraged loans, was spun off from KKR & Co. in 2004. At Monday's close, KFN had a market cap of approximately $1.9 billion, nearly a third of KKR's $7.15 billion.

"Through this transaction, we are acquiring a business with a fully invested, complementary portfolio of assets while increasing the scale and diversity of KKRs balance sheet. Furthermore, through the distribution of KFN's realized earnings, the transaction is expected to provide a meaningfully greater recurring component to KKRs distribution and also be immediately accretive on a total distribution per unit basis," said KKR's Co-CEOs Henry Kravis and George Roberts in a statement.

The transaction will close in the first half of 2014, most likely in the second quarter.

Deutsche Bank downgraded KFN to "hold" from "buy" on the news.

"We expect shares to trade roughly in line with the implied value of KKR's offer of 0.51 units per share of KFN," analyst Stephen Laws wrote in a note. "Given this and our belief that it is unlikely KKR will increase the offer to acquire KFN, we are downgrading shares."

Oppenheimer kept its "outperform" rating and $25 price target on KKR.

"The price paid (a 0.51 share-for-share exchange) is reasonable at ~1.2x book value and is accretive on most metrics: book value will increase 13%, the distribution by 7%, and DE by 2%," said analyst Chris Kotowski in a report.

TheStreet Ratings team rates KKR Financial Holdings LLC as a Hold with a ratings score of C. The team has this to say about their recommendation:

"We rate KKR Financial Holdings LLC (KFN) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its attractive valuation levels and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for KKR Financial Holdings LLC is currently very high, coming in at 73.47%. Regardless of KFN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, KFN's net profit margin of 28.90% significantly outperformed against the industry.
  • The revenue fell significantly faster than the industry average of 13.4%. Since the same quarter one year prior, revenues fell by 38.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Diversified Financial Services industry. The net income has significantly decreased by 64.4% when compared to the same quarter one year ago, falling from $111.96 million to $39.89 million.
  • The debt-to-equity ratio is very high at 2.32 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.

TheStreet Ratings team rates KKR & Co LP as a Buy with a ratings score of A-. The team has this to say about their recommendation:

"We rate KKR & Co LP (KKR) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, growth in earnings per share, increase in net income and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • KKR's very impressive revenue growth greatly exceeded the industry average of 8.8%. Since the same quarter one year prior, revenues leaped by 70.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 34.69% and other important driving factors, this stock has surged by 72.47% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, KKR should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • KKR & CO LP has improved earnings per share by 34.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, KKR & CO LP increased its bottom line by earning $2.23 vs. 4 cents a share in the prior year. This year, the market expects an improvement in earnings ($2.49 vs. $2.23).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Capital Markets industry. The net income increased by 60.7% when compared to the same quarter one year prior, rising from $127.41 million to $204.74 million.
  • The gross profit margin for KKR & CO LP is currently extremely low, coming in at 4.11%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, KKR's net profit margin of 44.9% significantly outperformed against the industry.

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