KKR Blinks First In a $7 Billion Poker Game

(Bloomberg Opinion) -- KKR’s poker face slipped during negotiations to purchase the Magneti Marelli car parts business from Fiat Chrysler Automobiles N.V. The U.S. buyout firm’s bluff was called, and it has agreed to pay an astonishing price to prevent the company falling into rival hands.

Fiat prepared the unit for separation earlier this year, ostensibly pursuing a spin-off while indicating it was also open to a sale. A carve-out would have been possible despite increasingly unstable Italian politics, but the aversion to the country’s stocks would hardly have helped the valuation. No problem. There was enough interest from private equity to support an auction.

KKR’s car part supplier Calsonic Kansei Corporation made early headway in talks but lost exclusivity when it indicated it wouldn’t get to Fiat’s floor price of 6 billion euros ($6.9 billion). Then Calsonic blinked and tied up an agreement at 6.2 billion euros. The price equates to just under 7 times analyst estimates for this year’s Ebitda at Magneti Marelli. Its French rival Faurecia SA trades on 3.3 times, Fiat itself at 1.7 times.

Unlike the pure private equity bidders, Calsonic at least brings some industrial synergies. These could be worth 200 million euros annually, according to analysts at Evercore ISI. But even if you add these to an estimated 530 million euros of operating profit and deduct tax, the return from this deal is plausibly only a high single-digit percentage. That’s probably lower than the acquired assets’ cost of capital. If Calsonic were a listed company, shareholders would be screaming.

The reality is that KKR was in a bind. Like Magneti Marelli, Calsonic needs greater scale. Had it lost out on this acquisition, its standalone path was slow. The deal means Calsonic will be a more credible and global business with a better sales pitch to equity investors should KKR choose to exit via an initial public offering. There is time to make the deal pay off. The purchase of Calsonic was completed only last year.

Fiat, chaired by John Elkann and led by new boss Mike Manley, has shown it can do M&A in a way that respects the memory of the late Sergio Marchionne. Manley will come under pressure to return some of the proceeds to investors. Not long ago, equity analysts valued Magneti Marelli at not much more than 3 billion euros. Fiat had a different view on value, and KKR has clearly endorsed that. It’s now up to KKR to prove that it wasn’t mistaken.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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.

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