Back in the 1970s, KKR (KKR) essentially invented the private equity (PE) industry. But to maintain its leadership, the firm had to adapt beyond just piling up lots of debt on a company’s balance sheet.
To this end, KKR has become much more strategic with its dealmaking — and the results have often been extremely lucrative.
In fact, the company’s dealmaking successes have made it possible for the firm to pay juicy dividends — KKR stock currently yields more than 8%. But KKR is also setting itself up for solid growth in the longer term, as well.
KKR Buys Bayer’s Diabetes Unity
Let’s take a look at the most recent example of the company’s sophisticated dealmaking: KKR, which is currently in a healthcare-related joint venture with Panasonic Corporation, agreed to purchase the diabetes care unit of Bayer AG (BAYRY) for about $1.13 billion.
The diabetes unit manufactures medical devices that help monitor glucose. The unit isn’t really core to Bayer’s operations, despite posting revenues of about 909 million euros (devices are sold across more than 125 countries). Yet the business was really not core to Bayer (the company is much more focused on prescription and OTC drugs).
But this deal could ultimately have a big impact for KKR, which owns 80% of the joint venture with Panasonic. Keep in mind that the business — which manufacturers glucose monitoring meters and strips — has been around for over 20 years and has a dominant position in the Japanese market.
However, by combining with the Bayer unit, KKR will be able to leverage the unit’s global sales network. And of course, the target market is enormous. There are almost 350 million people across the world who have diabetes.
Diabetes-related medical costs have also soared, which has resulted in pricing pressures for diabetes providers. So to deal with this, companies will need scale — which is a key part of the KKR strategy.
This deal looks spot-on, but it’s not the only place KKR has been excelling with M&A. The company has been busy applying its playbook to other major categories. Here are some recent examples:
Air Medical: This company is a leading provider of air ambulance services, transporting more than 75,000 critically injured patients last year. With capital from KKR, the company should benefit from an expansion of services. There will also be opportunities to buy rivals, as the market is highly fragmented with a plethora of local operators.
Fujian Sunner Development: This company is one of the top vertically integrated chicken meat producers in China. As should be no surprise, the market has many smaller operators. So with the help of KKR, Fujian Sunner will have the resources to bulk up with acquisitions.
Ticket Monster: The company is a top mobile commerce company in South Korea. KKR, which bought a major position from Groupon (GRPN), has plans to use Ticket Monster as a platform to expand across Asia.
If you want to see how this platform strategy can result in strong returns, take a look at the going-private transaction of Alliance Boots (a major European pharmacy), which was struck back in 2007. Even though it was near the top of the private equity boom, KKR still made a massive 4x return.
Bottom Line for KKR Stock
For the most part, KKR is one of select number of firms that has the experience, talent, infrastructure and capital to make these kinds of deals. The good news is that the firm continues to find opportunities in diverse industries like retail, energy, healthcare and even technology. No doubt, this kind of savvy dealmaking should help keep the dividends rolling for KKR stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
