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Business & Money

Experts debate whether KKR's leveraged buyout of UniSource Energy is right for the industry.
Fortnightly Magazine - February 2004
  1. of which is being contributed to TEP as equity and the other half used to acquire the public equity, the Partnership acquiring the entity is not expected to itself be leveraged. While this would increase the equity returns, there is a perception risk that would have a negative impact on the regulatory oversight/approval process, which will include both FERC and the ACC. Given KKR's commitment to the utility sector, they would have a lot to lose by hiding leverage on the structure.
  2. There are several sources of upside that KKR will rely on: (i) additional leverage on the structure; (ii) the realization of cost savings initiatives from the Citizens deal; (iii) savings from the elimination of public company costs; (iv) synergistic add-on acquisitions; and (v) a very good load growth region in Arizona.
  3. The existing $2 billion of debt - The debt is expected to be rolled. There is not a change of control at the utilities. Therefore, the utility debt (which is currently where the debt resides) is not implicated. Only this transaction is putting debt at the holding company.
  4. Return analysis - The returns don't appear to be as poor as one might think. If the run rate EBITDA is really over $400, it appears that the cash on cash return to the equity, including the benefit of the holding company leverage, could be close to 20 percent without the benefit of any acquisition vehicle back leverage.


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