U.S. Securities and Exchange Commission
Washington, DC 20549
NOTICE OF EXEMPT SOLICITATION
1. Name of the Registrant:
KKR FINANCIAL HOLDINGS LLC
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2. Name of the person relying on the exemption:
CHANGE TO WIN INVESTMENT GROUP
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3. Address of the person relying on exemption:
1900 L STREET, NW, SUITE 900, WASHINGTON, DC 20036
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4. Written materials. Attach written materials required to be submitted
pursuant to Rule 14a-6(g)(1):
CTW INVESTMENT GROUP
April 21, 2014
Dear KKR Financial Holdings (KFN) shareholder,
As you are likely aware, on December 16, 2013, KKR & Co L.P. ("KKR") and KKR
Financial Holdings LLC ("KFN") announced that they had entered into a
definitive agreement for KKR to acquire KFN, subject to shareholder
approval./i/ THE CtW INVESTMENT GROUP URGES KFN SHAREHOLDERS TO VOTE AGAINST
THE TAKEOVER AT THE SPECIAL MEETING OF KFN SHAREHOLDERS ON APRIL 30, 2014.
The KFN board should review the transaction and ensure shareholders have the
opportunity to vote on a fair proposal for the following reasons:
- We believe that this transaction is not in the best interests of KFN
shareholders because it grossly undervalues KFN and because the process
was fraught with conflicts of interests;
- If KFN shareholders trade in their shares for KKR common units, they will
lose significant rights, protections and influence; and
- KFN shareholders have already indicated their dissatisfaction with the
transaction through extensive and ongoing litigation.
The CtW Investment Group works with pension funds sponsored by affiliates of
Change to Win - a federation of unions representing over six million members
o enhance long-term shareholder value through active ownership. These funds
have $250 billion in assets under management and are substantial KFN
shareholders.
KKR'S CONTROL OVER KFN IS EXTENSIVE AND WELL-KNOWN
KFN is managed and controlled by KKR, a private equity firm well known for its
aggressive takeovers, but much less experienced in navigating fiduciary
and shareholder rights. KKR established KFN as a REIT in 2004. After KFN hit
serious financial trouble, KKR restructured it as a diversified specialty
finance company in 2007. This restructuring led to adoption of standard
shareholder protections for KFN shareholders. In contrast, KKR itself has
avoided providing meaningful shareholder rights to holders of its common units
because it is structured as a limited partnership.
KKR's control over KFN is extensive and well-known. KFN operates under a
management agreement with KKR that defines its strategy and the scope of its
investments. The management agreement renews automatically each year and can
only be terminated under limited circumstances, with nearly six months advance
notice to KKR and the payment of a termination fee equal to four times the
average annual base management and incentives fees from the prior two
years./ii/ KKR's tight control is also evident in the opacity of KFN's asset
base, which is largely made up of illiquid securities valued through internal
modeling systems.
KKR has described how it will benefit from the takeover of KFN, including
through an increased capital base to support KKR's investment management
strategies, increased diversification of KKR's balance sheet and an increase of
future KKR distributions./iii/ As described below, KKR took advantage of its
controlling relationship to define the terms of its proposed takeover,
shortchanging shareholders in the process.
KFN'S CAPTIVE BOARD IS BEHOLDEN TO KKR MANAGEMENT
A number of KFN's twelve board members are insiders or have relationships that
raise questions about their independence in recommending this transaction./iv/
Even within the six-director transaction committee created to evaluate the KKR
offers, a number of these directors arguably have conflicts of interest and
close ties to KKR/v/. This deal's low valuation and lackluster negotiation
process further demonstrate that KFN's directors failed to discharge their
fiduciary duties and adequately negotiate on behalf of KFN's public
shareholders.
1900 L Street, NW, Suite 900 Washington, DC 20036
202-721-6060
www.ctwinvestment group.com
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This transaction is also facing a more robust legal challenge than is typical.
According to Cornerstone Research, the KFN/ KKR transaction ranks among the top
five most litigated deals of 2013 (by number of lawsuits)./vi/ The lawsuits
allege that the board of directors breached its duties to KFN shareholders in
approving the deal because it conducted a flawed sales process that failed to
maximize shareholder value. These actions are said to constitute a breach of
the fiduciary duty of loyalty that the directors owed to KFN shareholders.
The lawsuits also allege that the KFN board failed to conduct a sufficiently
competitive sale, that restrictive deal protections discouraged additional
bids, and that there were substantial conflicts of interest tainting the
negotiations. Several Delaware cases have been consolidated into one case,
In re KKR Financial Holdings LLC Shareholder Litigation, which seeks an
entire fairness hearing./vii/
THE TRANSACTION GROSSLY UNDERVALUES KFN
KKR is using its controlling relationship to take over KFN at a deep discount
to its intrinsic value. The deal placed the value of KFN stock at $12.79 per
share, for a total value of $2.6 billion. While this is a 35% premium to
KFN's closing price as of the announcement date, in fact KFN's share price
that day was the lowest it had been in the previous twelve months and KKR's
share price was at its highest.
Advisors to KFN and KKR provided information that further demonstrates the
reported premium was artificial and inflated. According to a report to KFN's
board by Sandler O'Neil, the deal would have represented a negative premium if
the valuation had been based on 52-week volume-weighted average price (VWAP)
figures for each company's share prices./viii/ Additionally, in a report to
the KKR board, Goldman Sachs reported the adjusted book value of KFN to be
$11.09, more than 20% higher than the stock traded just before the deal
announcement. While the KFN board had at its disposal these alternate figures,
it relied on information that was skewed and representative of short-term share
price rather than the actual value of the company.
THE NEGOTIATION PROCESS WAS CONFLICTED AND COMPROMISED
The KFN board of directors appears to have made no effort to pursue alternatives
or solicit competing bids. And any competing bidders would have faced extremely
high barriers in the form of extensive deal protections and hundreds of millions
of dollars in fees.
The board's decision to forgo an auction process is a cause for concern because
shareholders have little assurance that the offer price reflects the true, fair
value of the company's assets.
The deal protection provisions are also preclusive. The combined break-up fee
and management termination fee represent approximately 9.6% of the total
consideration, which is unusually high, presenting a serious disincentive to any
competing offers.
Additionally, the purchase agreement contains no appraisal rights for KFN
shareholders and no price collar provision that would have ensured that drops
in KKR's price did not affect the value that KFN shareholders would receive.
The decline in the price of KKR shares from announcement to the close of
business on April 9, 2014 has decreased the value of the implied consideration
to $11.84. This is an 8% decrease from the value stated on the day the deal
was announced.
MERGER WOULD ELIMINATE VOTING RIGHTS AND FIDUCIARY DUTY
Following completion of the takeover, KFN shareholders would have a minority
interest in a limited partnership, which carries fewer shareholder rights and
protections than the current holdings in KFN. According to KKR's registration
filing, "holders have only limited voting rights relating to certain matters
and, therefore, will have limited or no ability to influence management's
decisions."/ix/ KKR shareholders do not elect KKR's board of directors.
KKR's partnership agreement sharply limits duties now owed to KFN shareholders,
including fiduciary duties./x/ Shareholders will not have any recourse
available to them to challenge breaches of duty or conflict of interests. If
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KFN shareholders trade in their shares for KKR common units, they will be left
with an inferior and very limited set of rights as investors.
KFN SHAREHOLDERS DESERVE A BETTER DEAL
KFN shareholders should have the opportunity to participate in the upside
potential clearly present in KFN's asset base and investment strategy, but the
current transaction deprives them of this opportunity by undervaluing their
holdings and exchanging it for inferior securities.
We believe the Board is acting as an agent of KKR rather than its own
shareholders. Absent a better deal, shareholders should be able to retain their
KFN stock, which may have a strong potential for growth, based on its diverse,
counter-cyclical business model, and its role as an originator of collateral
loan obligations ("CLOs") and a holder of subordinated tranches in a rising
interest rate environment./xi/
Given these facts, and that KFN shareholders have already indicated their
dissatisfaction with the transaction through extensive and ongoing litigation,
the KFN board should review the transaction and ensure shareholders have the
opportunity to vote on a fair proposal. As such, we urge KFN shareholders to
vote against the takeover at the special meeting of KFN shareholders on April
30, 2014.
Sincerely,
/s/
Dieter Waizenegger
Executive Director, CtW Investment Group
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/i/ Form 8-K, KFN, Dec. 16, 2013.
/ii/ Form 10-K, KFN, Feb. 27, 2014.
/iii/ KKR Form 425, Feb. 14, 2014.
/iv/ The board considers directors Hazen and Nuttall to be insiders, as is CEO
Farr. (Mr. Hazen is on the board of Accel-KKR and is a "senior adviser to
KKR.") In addition, directors Collins, Hubbard, Kari, Licht and McAneny were
all placed on the KFN board while KKR controlled the Company prior to the
spinoff in 2007. Directors Kari and Licht were also long-time Wells Fargo
executives during the periods when director Hazen was Wells' President, CEO
and Chairman.
/v/ Six directors sat on the transaction committee, namely, directors
Collins, Edwards, Finigan, Kari, McAneny, and Ryles. As discussed in the prior
footnote, we question the independence of four of them.
/vi/ http://www.cornerstone.com/getattachment/73882c85-ea7b-4b3c-a75f-
40830eab34b6/Shareholder-Litigation-Involving-Mergers-and-Acqui.aspx
/vii/ In re KKR Financial Holdings LLC Shareholder Litigation, filed February
21, 2014.
/viii/ Sandler O'Neill + Partners LLP, Presentation Regarding Project WILDCATS,
Dec. 10, 2013, available at https://www.sec.gov/Archives/edgar/data/1386926/
000110465914011100/a14-5721_1ex99dc11.htm.
/ix/ KKR Form S-3, February 28, 2014. Pg 14. http://ir.kkr.com/kkr_ir/
secfiling.cfm?filingID=1047469-14-1599&CIK=1404912
/x/ KKR Form S-3, February 28, 2014. Pgs 5-7. http://ir.kkr.com/kkr_ir/
secfiling.cfm?filingID=1047469-14-1599&CIK=1404912
/xi/ Wells Fargo Equity Research (Oct. 24, 2013).
This is not a solicitation of authority to vote your proxy. Please DO NOT send
us your proxy card as it will not be accepted.
[This letter was an attachment to the following tweet:}
(CtWIG logo) CtW Investment Group@CtWinvGrp 2h
CtW Investmenbt Group calls on investors to oppose KKR's
acquisition of affiliate, KFN - see our letter ow.ly/vZudC
This is not a solicitation of authority to vote your proxy.
Do not send us your proxy card as it will not be accepted.