LBO Specialist Firm, KKR Made $50 Billion Bid For Vivendi; How Does It Affect Web 2.0?

Posted Nov 4, 2006

Rafat Ali at PaidContent has reported that Kohlberg Kravis Roberts & Co. had secretly made a bid of $50 billion for Vivendi. If this deal is to take place, it be the “largest leveraged buyout offer* [LBO] in history [source].” And it wouldn’t be the first time that KKR would be responsible for the largest LBO either.

The 1988 LBO by KKR of RJR Nabisco for $31.4 billion with a net debt of $6.3 billion was the largest price ever paid for a commercial enterprise as well. Then KKR was responsible for a follow-up purchase of HCA Inc. for $33 billion. The purchase of RJR Nabisco was the inspiration for #1 New York Times best-selling book and follow-up movie, Barbarians at the Gate: The Fall of RJR Nabisco (book written by Bryan Burrough and John Helyar).

How is this pertinent for the Web 2.0 world? YouTube could be affected by this transaction. Vivendi SA, the French media conglomerate owns Universal Music. On October 9, YouTube and Universal Music formed a strategic alliance to have unauthorized videos removed and Universal Music agreed to provide videos for YouTube to use legally. Now that another party is getting involved and is potentially buying the parent company of Universal Music, the terms and conditions of the YouTube-Universal Music partnership may change.

However, there isn’t enough information available presently about what would actually happen to the YouTube-Universal Music partnership if KKR does buy Vivendi. For all we know, KKR may or may not intervene.

*Leveraged buyout:

A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or “bootstrap” transaction) occurs when a financial sponsor gains control of a majority of a target company’s equity through the use of borrowed money or debt. A leveraged buyout is essentially a strategy involving the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. In an LBO, there is usually a ratio of 70% debt to 30% equity.”

[Source: Levaraged buyout – Wikipedia]