How a £15bn KKR deal blew up

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In today’s newsletter:

The company that was so inflation-resistant, it shattered a mega-deal

KKR was two days away from bagging a bargain.

Alongside Australia’s Macquarie Group, the private equity giant was preparing to buy Britain’s largest electricity distributor, UK Power Networks, for £15bn.

For a buyouts industry that has been pushing into infrastructure funds, through which it can hold a company for a decade or more — and benefit from all of the associated fees and dividends in that time — it was a dream deal.

UKPN is not a glamorous, high-growth proposition. It gets its revenue from residents of south-east England paying their electricity bills — the kind of steady, sticky revenue you can comfortably borrow against to fund payouts to investors.

Better still, it stands to be a winner in an inflationary world, at least relatively. Like other privatised parts of the UK’s infrastructure, its returns are set by a regulator and are linked to a price index — meaning they rise with inflation. And because the business is not labour-intensive, that advantage typically outweighs the extra costs that inflation brings.

On top of that, a chunk of regulated utilities’ debt has interest payable in nominal terms, as Lex points out. That means payments on those bonds will not rise, further enhancing the returns from inflation-pumped revenues.

The company was so inflation-resistant, it turns out, that it ultimately crashed the deal.

As talks entered their later stages last month, UK inflation hit 9.1 per cent. That led the electricity distributor’s owner, billionaire tycoon Li Ka-shing’s CK Infrastructure Holdings, to increase the price just as a deal was about to be inked, the FT’s Gill Plimmer revealed.

KKR, Macquarie and the other bidders in their consortium decided the asking price was too high, and walked away.

DD reckons the buyers’ advisers Rothschild, Citigroup and Nomura were less than thrilled: due diligence had been going on for a year, one person close to the bidders said.

It’s easy to see why CK wanted a higher price.

But it must have been a significant mark-up to make the buyers back out at the eleventh hour — the person close to the bidders described the increase as “massive”.

Klarna: Buy now, pray later

Klarna, a pioneer of the “buy now, pay later” sector, offers shoppers the ability to split any purchase into interest-free payments — though some disgruntled customers have complained of exorbitant late fees should a payment fail to go through.

Investors in the Swedish payments company may also be regretting their initial purchases.

The former start-up darling, which surged in popularity during the pandemic as consumers looked to spread out the cost of purchases, is set to raise fresh capital at a valuation of about $6.5bn, a fraction of the $46bn it was valued at just a year ago, three people with direct knowledge told the FT.

The $600mn deal, which is still being finalised, will pull funds from investors including Sequoia Capital and Abu Dhabi’s Mubadala, two of these people added, in a dramatic reversal of fortune for what was one of Europe’s most valuable private tech companies.

Klarna was among the front-runners of European fintech, luring Silicon Valley venture capitalists such as Lightspeed Venture Partners and General Catalyst across the Atlantic.

But the lender has cut 10 per cent of its workforce as it battled whipsaw markets, rising credit costs, and a mounting backlash against short-term credit, which regulators have alleged causes vulnerable consumers to take on unsustainable debt.

The lacklustre funding round is the latest test of faith for Europe’s fintech scene after a similar down round at payments servicer SumUp. It’s also a test for Klarna chief executive Sebastian Siemiatkowski, who told the FT’s Richard Milne in May that he was not sold on reports that his business would suffer a down round.

The Klarna collapse also marks yet another disastrous investment by Masayoshi Son and his team at the Vision Fund, given that the Japanese investment group were the lead investors in the $46bn round last year. (DD admires Son’s ability to press on after each incredibly horrible bet.)

The damage goes beyond Klarna. US-based Affirm’s shares have crashed nearly 90 per cent from a record high in October and it struggled to sell debts earlier this year before offering higher yields.

Jack Dorsey’s payments company Block — formerly known as Square — has dropped 74 per cent over the past year. Its market cap sits at a meagre $37bn, despite having completed a $29bn acquisition of Australian buy now, pay later business AfterPay in February.

It’s a sign of the times that lenders offering zero-cost credit are bearing the brunt of a valuation reset, just as central banks increase interest rates and profits return to the forefront of investors’ minds.

There’s no easy way to see how the sector bounces back. The excesses of the pandemic are being forgotten. Klarna and its peers will have to fight for their survival.

The Chinese billionaire confronting dicey markets and dicier politics

Many of Guo Guangchang’s closest peers are behind bars.

The Chinese billionaire, whose expansive empire includes French resort group Club Med, Portugal’s biggest bank and English football club Wolverhampton Wanderers, is among the last standing from a posse of highflying Chinese dealmakers.

They led a record explosion in offshore investment before being brought back down to earth when president Xi Jinping and the ruling Chinese Communist party in late 2016 cracked down on a years-long debt-fuelled acquisition spree.

Guo, now 55, who had emerged from that period bruised but not undone, has now shot back into the spotlight. A sharp sell-off in property bonds has sparked fears over a liquidity crunch and $38bn in liabilities owed by his expansive Fosun group, the FT’s Edward White and Cheng Leng report.

Analysts from Moody’s were blunt: “Fosun has a weak financial profile . . . recurring income, mainly dividends from underlying investments, is inadequate to cover the interest and operating expenses.”

Refinancing via the offshore dollar bond market has quickly become tough with rising interest rates and with investors souring on China’s companies after a series of defaults by the likes of Evergrande. That means more divestments and far fewer acquisitions look likely — Guo has had a busy year with $2bn in divestitures.

Guo, the great survivor, has espoused a boundless trust in the market.

“If there is a saviour in the world, that will be the market. In the market, only you can save yourself,” he said in a 2018 speech.

Despite some of the ruthless reprisals faced by many others among Guo’s billionaire class, don’t count him out just yet.

Job moves

• Francesco Milleri, one of Leonardo del Vecchio’s closest lieutenants, is taking over the Italian eyewear tycoon’s Luxembourg-based holding company Delfin following his boss’s death last week.

• Austrian property magnate Cevdet Caner has been named as CEO of Aggregate Holdings in a surprise move that will also see him take a 20 per cent stake in the company linked to allegations facing German property group Adler.

• EasyJet operating chief Peter Bellew has resigned following a period of heavy disruption and thousands of flight cancellations. Flight operations director David Morgan will serve as interim COO.

• Deutsche Bank managing director Tammo Buennemeyer has joined Morgan Stanley’s office in Frankfurt.

• Sidley Austin has hired Tony Downes as a partner in its M&A and private equity practice, based in London. He joins from Proskauer.

Smart reads

Read it and weep The Big Short author Michael Lewis has spent his career chronicling the gall and greed of Wall Street. His latest work examining the US’s pandemic response reflects a similarly broken system. Read the FT interview here.

Rotten luck Lotto-whispering lawyer Jay Kurland won the trust of jackpot winners, then lost their mega-millions in what prosecutors allege was an elaborate fraud scheme, Bloomberg writes.

Boardroom battles heat up Activist investors are likely to seize on the momentum of recent shareholder wins to push abortion and other social issues to the forefront, the FT’s Patrick Temple-West writes.

News round-up

Wirecard’s former top accountant admits forging documents for KPMG special audit (FT)

Credit Suisse struggles with backlog of new wealthy client accounts in Asia (FT)

AustralianSuper adopts ‘defensive’ strategy after first loss since 2009 (FT)

Volatility and gambling reform toughen the odds for 888 bond deal (FT)

Rogers, Shaw start Canada antitrust talks over blocked C$20bn merger (Reuters)

Mukesh Ambani: India’s top businessman starts succession planning (FT)

Vatican suffers £100mn-plus loss on Knightsbridge office sale (FT)

City lawyers’ pay: the squeezed middle (Lex)