Why KKR Financial Shares Flew

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of KKR Financial Holdings LLC (NYSE: KFN  ) soared 27% today after private equity giant KKR & Co. (NYSE: KKR  ) agreed to acquire the specialty finance company, which it already manages, for $2.6 billion.

So what: The all-stock deal -- 0.51 common units of KKR for each KKR Financial share held -- values KKR Financial at $12.79 per share and represents a premium of 35% of its Monday closing price. KKR is making the move to expand and diversify its asset base, but judging from its own stock's 3% plunge today, Mr. Market isn't thrilled with the price management is paying to do it.

Now what: The deal is expected to close in the first half of 2014. "Through this transaction, we are acquiring a business with a fully invested, complementary portfolio of assets while increasing the scale and diversity of KKR's balance sheet," said KKR Co-Chairmen and Co-CEOs Henry Kravis and George Roberts. "Furthermore, through the distribution of KFN's realized earnings, the transaction is expected to provide a meaningfully greater recurring component to KKR's distribution and also be immediately accretive on a total distribution per unit basis."

So while KFN's upside might be limited at this point, KKR's bolstered asset base and improved yield profile are certainly worth looking into. 

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