KKR Offers $3 Billion to Free a U.K. Market Hostage

Bookmark

KKR & Co.’s latest deal to take a U.K. company private neatly illustrates why the London market is a rich hunting ground for the buyout industry. The 2 billion-pound ($2.8 billion) offer for infrastructure company John Laing Group Plc targets a business that’s more hampered than helped by being listed.

Laing has niche appeal as a publicly traded infrastructure company. It co-invests in projects to develop the likes of wind farms and toll roads, often exiting just as they start to generate cash. This brings periodic windfalls to fund ad-hoc shareholder payouts and provide capital for the next big dig.

But stock market investors in this sector generally seek stable and steady dividends. Laing tries to meet such expectations. Its “special dividends” are so frequent they’re not really special, and, in any case, it pays ordinary dividends twice-yearly too. The funding burden for these rests on disposal proceeds rather than reliable operating cash flow from mature assets. This risks pressurizing management to exit investments too soon, simply to funnel cash to shareholders.

Laing has a complicated portfolio that’s hard for outsiders to value, and is just as much effort to understand as much bigger stocks that aren’t so thinly traded. The company has sparse analyst coverage, a common situation following regulation that’s undermined investment research in smaller firms. It’s also got a rough history, having written down the value of some its renewables assets in 2019 and 2020.

Enter KKR with an offer at a 35% premium to Laing’s net asset value (NAV), roughly where the stock has been trading this year. At 403 pence a share, the bid just clears Laing’s pre-Covid high. There aren’t many opportunities to buy a geographically diverse bundle of stakes in sizable projects across multiple sectors. This is a big equity check, hence KKR has roped in a partner, infrastructure investor Equitix. 

The price today delivers a valuation that Laing Chief Executive Officer Ben Loomes had indicated could take three to four years to achieve. He recently said he was targeting shareholder returns of 9%-12% “over the medium term.” As it happens, the shares’ total return from their 2015 initial public offering to when takeover interest emerged this month is also 12%.

KKR’s payback will be lower and require patience. Infrastructure funds target high single-digit returns and aren’t in a hurry. One way to get there would be if Laing’s NAV doubled to 3 billion pounds in eight years, with around 500 million pounds of dividends along the way. That’s not demanding. Arguably, Laing could perform better under private ownership, eliminating the need to make quasi-forced asset sales to fund special dividends. 

Investors see the chance of a counterbid or an activist demanding a sweetener: The shares closed yesterday within 1% of the offer even though completion is months away. Soros Fund Management, with 4%, has given a letter of intent to accept. The top five shareholders, with more than 40%, have not. An uplift in the reported NAV in the coming months would provide the pretext for a raise. But as things stand, Laing looks better suited to private ownership and without KKR’s offer the standalone path to comparable value looks arduous.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.