J.P. Morgan,Credit Suisse First Boston and Lehman Brothers are all playing a role in the debt financing for Kohlberg Kravis Roberts & Co., J.P. Morgan Partners and Wachovia Capital Partners' $880 million purchase of UniSource Energy. The acquiring group will use approximately $556 million in equity and about $660 million in debt financing to fund the acquisition, according to Kevin Larson, UniSource's v.p., cfo and treasurer.
Larson explained that the debt financing will consist of $360 million in bank debt and a notes offering of approximately $300 million. In addition to backing the UniSource purchase, the proceeds will go toward a $260 million contribution to Tucson Electric Power Co., UniSource's principal subsidiary. Tucson Electric will use the money to pay off debt.
The UniSource transaction will also include the assumption of approximately $2 billion in debt, most of which will be refinanced around the time of the closing. Tucson Electric currently has $1.9 billion in debt while UniSource Energy Services, UniSource's other subsidiary, has approximately $200 million in debt, according to Larson. He noted that J.P. Morgan, CSFB and Lehman have provided commitments for the refinancing facility.
The investor group approached UniSource with the deal, Larson noted. The company recently acquired assets from Citizens Communications and completed the financial closing of Springerville Unit 3, a new coal-fired generator. Along with the attractive capital markets, these factors contributed to the timing behind the acquisition, he commented.
KKR will provide 60% of the equity, J.P. Morgan Partners around 35% and Wachovia around 5%, according to a source familiar with the deal. The company's EBITDA is approximately $336 million. The private equity firms have formed a company called Saguaro Utility Group that is buying UniSource's common stock for $25.25, representing a premium of 30% over the closing price on Nov. 21. "[The] 30% premium is a big value to shareholders," Larson said. He believes the benefit to going private, given who the investors are, is improved access to capital. Private equity tends to be longer-term investors, he added. UniSource serves approximately 5,000 customers across Arizona.