KKR — the initials stand for Kohlberg Kravis Roberts & Co. — is the best-known private equity buyout firm in the world. If you've heard of leveraged buyouts — which involve the heavy use of borrowed money to engineer a takeover — it's probably because of KKR. It's been at the centre of some of the biggest buyouts in history, including several multi-billion-dollar deals in Canada.

A bit of history

KKR was formed in 1976 by Jerry Kohlberg and two cousins, Henry Kravis and George Roberts. The three had worked together at the New York-based investment bank Bear Stearns.

KKR's website spells out the company's mission in benign language. It says it "acquires industry-leading companies and works with management to grow and improve them and thereby create shareholder value."

The "works with management" part hasn't always been the hallmark of the way KKR operates. Its ferocious battle for control of the food and beverage giant RJR Nabisco in 1989 (which KKR ultimately won with a $25.4 billion US bid) was chronicled in the bestselling book, Barbarians at the Gate, and solidified KKR's reputation as a formidable adversary.

KKR's business template involves the search for undervalued firms with some combination of the following: little debt, steady cash flow, an industry-leading position, the potential to grow value, a languishing stock price and/or unhappy institutional shareholders. Then, it often approaches management with a proposal to take the company private. KKR will put together a deal with a consortium of other investors that could include investment banks, private or corporate pension funds, university endowments, even other private equity firms.

In the case of a leveraged buyout, much of the financing comes from borrowed money or from issuing debt. The company's assets are the collateral. Typically, KKR will not try for a quick flip, but will hang on to the company for several years, improving the company's financial performance, building its value, and then eventually exiting from its investment — ideally at a handsome profit for all concerned.

Sometimes, KKR makes its money by buying conglomerates and then selling off the parts for a tidy profit. That's what happened in its takeover of Beatrice Cos. in 1986. Beatrice owned the Avis car-rental firm, Tropicana juice and Playtex, among others. KKR's analysts said the market wasn't recognizing the true worth of Beatrice. They were right. In the following years, KKR sold off most of the big names in the Beatrice empire, making billions in profit by some estimates.

Its acquisition of the U.S. Safeway chain in 1986 was one of its most lucrative ever and one of its most controversial. It saddled the company with billions of dollars in debt and slashed tens of thousands of jobs. It also made a fortune. KKR paid $4.3 billion US for Safeway, but used only $130 million US of its own money, Fortune magazine later reported. KKR's total profit on the deal apparently came to more than $5 billion US.

This isn't to say that KKR has always made money. Some of the companies it bought even went bankrupt. But overall returns were good enough that the company's financial partners have generated solid double-digit returns, and its founders are billionaires (Forbes magazine, for instance, puts Kravis's worth at $2.6 billion US)

By early 2007, KKR had engineered more than 150 transactions worth more than $300 billion US. As of September 2006, its own investments in its targeted firms were worth $70 billion US, almost triple the money it invested in the first place.

KKR's Canadian connections

KKR has put together buyout deals all over the world. But its first international foray took place in Canada, when it bought Canadian General Insurance Group in 1995. Since then, it has made three other big investments in Canada. These days, it likes working with management, striking friendly deals.

Shoppers Drug Mart: In 2000, conglomerate Imasco said KKR had won a seven-way bidding war for its Shoppers Drug Mart division, paying $2.55 billion for Canada's biggest drugstore chain. Shoppers went public in 2001 and KKR subsequently sold most of its shares, reaping a handsome profit.

BCE's directories business: In 2002, BCE sold its Bell Canada directories business for $3 billion to KKR, in partnership with the Ontario Teachers' Pension Plan. KKR and Teachers' later spun off the Yellow Pages directories into the Yellow Pages Income Fund and sold their investment, again for a profit.

Masonite International: In 2005, KKR paid $3.1 billion for all the stock of Masonite International, a building products company formed after Mississauga-based Premdor acquired Masonite. KKR still owns Masonite International.

In April 2007, BCE announced it was talking to KKR and several Canadian pension plans about the possibility of taking the telecom giant private. A takeover of BCE would cost more than $32 billion - making it the biggest corporate takeover in Canadian history and one of the biggest buyouts ever.

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