KKR battling over Brazil acquisition with sellers, bank -sources

Banco Bradesco

12/10/2016 21:02

By Tatiana Bautzer 
    SAO PAULO, Oct 12 (Reuters) - KKR & Co LP's  KKR.N  
ill-fated takeover of a Brazilian data center provider has 
embroiled the private equity firm in a battle with the sellers 
in the deal as well as a key lender as it struggles to unwind 
the transaction on its own terms.     
    KKR's first-ever direct investment in Brazil, which entered 
its deep recession the year the takeover closed, underlines the 
hazards of acquisitions in Latin America's largest economy, 
especially for foreign investors less familiar with its 
workings. 
    The showdown over Sao Paulo-based Aceco TI has KKR accusing 
its former owners of concealing bribery and accounting fraud at 
the time of the 2014 sale. Pending the outcome of that dispute, 
the private equity firm has also halted payments on the bank 
loans that financed the deal, infuriating key lender Banco 
Bradesco  BBDC4.SA , people familiar with the dispute said. 
    While KKR blames the alleged wrongdoing for a slump in 
Aceco's revenues and profits since the takeover, the sellers - 
rival private equity firm General Atlantic and Aceco's founding 
Nitzan family - claim the problem was mismanagement and bad 
timing. 
    In an e-mailed statement to Reuters, former Aceco Chief 
Executive Jorge Nitzan denied the allegations of wrongdoing and 
said KKR's "investment timing could not have been worse and was 
exacerbated by post-acquisition mismanagement".  
    "Now, KKR is trying to undo the deal and blame others for 
its mistimed acquisition," Nitzan, a member of the family that 
founded Aceco, said in the statement. 
    KKR spokeswoman Kristi Huller said in a statement that 
"management wrongdoing" was the real cause of Aceco's woes. 
    KKR sought arbitration with the sellers months ago arguing 
that their failure to disclose the alleged accounting fraud 
should allow it to reverse the deal and get its money back.  
    But its refusal to service loans on the 1.5 billion real 
($375 million) takeover while arbitration is pending threatens 
to backfire. Bradesco recently sold a big chunk of its loan 
underlying the deal back to a Nitzan-controlled firm called NTS, 
which in turn moved to use the credit to grab back control of 
the company, sources said.   
    KKR's refusal to repay Bradesco, Brazil's No. 1 source of 
merger financing, shows how once cozy ties with Brazilian 
lenders have frayed as deals struck during the boom years 
unravel and private equity firms renegotiate loans or, in this 
case, default.  
 
    ACCOUNTING FRAUD 
    KKR is questioning Nitzan's actions in court, saying 
formalities to transfer the shares to a company Nitzan controls 
were not followed.    
    While a judge on Oct. 3 allowed the loan's sale and NTS's 
execution of the collateral to proceed, he deferred to another 
court the question of whether Nitzan has a right to exercise 
control at Aceco. 
    Nitzan has nevertheless effectively taken control of Aceco, 
and replaced KKR's appointed chief executive with former 
investment banker Caetano Fabrini. Nitzan's agreement with 
Bradesco requires him to resell Aceco to a third-party within 45 
days, according to people briefed on the matter.  
    The relationship between KKR and the Nitzans soured less 
than a year after the acquisition. KKR, which is based in New 
York, sought arbitration with the sellers. 
    KKR's complaint in that arbitration cites an investigation 
by law firms Simpson Thacher & Bartlett LLP and Pinheiro Neto 
Advogados, and auditors KPMG LLP. The 90-page probe, reviewed by 
Reuters, alleged that Aceco paid 57 million reais in bribes to 
government officials, lobbyists and middlemen during various 
stages of 30 different contracts. 
    The projects involved data centers to different government 
agencies, courts, state-owned and private companies.     
    The report also accused the former owners of Aceco of 
inflating margins and reshuffling expenses among contracts. It 
said that almost 30 executives knew of the scheme. A regional 
state police enquiry into the alleged bribes has been launched, 
according to a document seen by Reuters. 
    In a statement to Reuters, Huller confirmed the report's 
findings, linking the alleged fraud to the sweeping kicback 
scandal at state-run oil firm Petrobras  PETR4.SA  that has 
implicated numerous contractors and politicians. 
    "KKR and Aceco are taking steps to remediate the wrongdoing 
while also seeking fair remedy for the sellers' fraud", Huller 
said, adding that the matter has been brought before authorities 
in Brazil.  
    Media representatives for Bradesco and General Atlantic 
declined to comment. Nitzan said KKR's lawyers had directed KPMG 
to carry out the probe to unwind the deal.  
    KPMG declined to comment.  
    Nitzan added that he is trying to save Aceco "from almost 
certain bankruptcy." 
    People close to Nitzan and General Atlantic say that KKR 
lost money in Aceco due to the economic downturn and excessive 
debt it took on. Aceco and its controlling vehicle borrowed a 
combined 600 million reais soon after the acquisition, a risky 
strategy in Brazil, where double-digit interest rates are 
routine, even for companies.  
    According to people briefed on the situation, Aceco is not 
repaying smaller amounts it borrowed from Itaú Unibanco Holding 
SA  ITUB4.SA  and Banco Santander Brasil SA  SANB11.SA . Most of 
Aceco's outstanding debt, around 370 million reais, is owed to 
Bradesco. None of the banks commented on the status of Aceco's 
loans. 
 
    FRAYING TIES 
    Bradesco and the other banks built up close ties with the 
buyout industry over the past decade, a period during which 
dozens of global funds scoured Brazil for takeover targets. 
    A team of Bradesco executives flew to New York in May to 
discuss terms of a potential repayment with KKR management, the 
people briefed on the situation said. However, after several 
rounds of talks, Bradesco shunned KKR's proposal to repay the 
acquisition debt in 13 years.  
    "This situation came as a surprise to lenders, and this is 
already impacting the relationship between the local banks and  
some segments of the private-equity industry," said one source 
close to the banks.  
    ($1 = 3.2166 reais) 
 
 (Editing by Guillermo Parra-Bernal and Christian Plumb) 
 ((tatiana.bautzer@tr.com; Tel: +55-11-5644-7756; Mob: 
+55-119-4210-4173; Reuters Messaging: 
tatiana.bautzer.thomsonreuters.com@reuters.net)) 
 
Keywords: KKR BRAZIL/