We had two rather large secondary offerings today where private equity firms are unloading stock.  The tally was about $3.4 billion that the market had to absorb in new shares as Kinder Morgan, Inc. (NYSE: KMI) sold about $2 billion in stock and Dollar General Corporation (NYSE: DG) sold about $1.4 billion in shares.  In both cases these sales are actually good for the public shareholders because it clears out more of the private equity ownership and allows for better corporate governance as far as ‘power of the shareholders’ is concerned.  Still, we are seeing two different reactions for different reasons in the offering.

Neither of these companies were part of our 11 Companies Where Shareholders Have No Power At All, but these do help the public as far as corporate governance in an indirect way.

Dollar General Corporation (NYSE: DG) is performing rather well on what appeared to be a share giveaway in the pricing of its secondary offering. The indication was a sale of 25 million shares of common stock, but the demand was enough that some 30 million shares were sold at a price of $46.75 per share. The selling shareholders also gave the underwriters an option to purchase up to 4.50 million additional shares as an overallotment and those shares were likely sold if you consider that Dollar General is now up 3.6% at $48.44 against a 52-week range of $29.84 to $49.50.

In the Dollar General sale, this was Kohlberg Kravis Roberts & Co. (NYSE: KKR) selling those shares.  The offering is important because KKR’s Buck Holdings has now sold enough that it is under the threshold of being the predominant controlling holder as the notes show: Buck Holdings, L.P. will beneficially own approximately 35% of our outstanding common stock (or approximately 34% if the underwriters exercise their option to purchase additional shares in full). As Buck Holdings, L.P.’s ownership may be less than 35% of our outstanding shares of common stock following the completion of the offering and the exercise of a certain portion of the underwriters’ option to purchase additional shares, the following actions may no longer require approval of the KKR shareholders party to the shareholders’ agreement dated as of November 18, 2009: hiring and firing of our CEO, any change of control as defined in the shareholders’ agreement, entering into any agreement providing for the acquisition or divestiture of assets for aggregate consideration in excess of $1 billion, and any issuance of equity securities for an aggregate consideration in excess of $100 million. Prior to the offering, the shareholders’ agreement provided that KKR had the right to designate up to 40% of the total number of directors comprising our board. Following the offering, KKR will have the right to designate up to 30% of the total number of directors comprising our board at such time, so long as Buck Holdings, L.P. beneficially owns more than 30% but less than or equal to 40%, of the then outstanding shares of our common stock.   Citigroup, Goldman Sachs, KKR, Barclays. and J.P. Morgan were the joint book running managers for the offering’ co-managers were BofA Merrill Lynch, Wells Fargo, Sanford Bernstein, Deutsche Bank Securities, and Macquarie Capital.

Kinder Morgan, Inc. (NYSE: KMI) is not faring out as well as Dollar General, but this may in the long run be better for shareholders who watch for control and corporate governance.  It was a sale by Goldman Sachs Group Inc. (NYSE: GS) as one of the private equity backers of this deal.  Kinder Morgan priced a public secondary offering of 63 million shares of its common stock at $31.88.  Also selling shares is the recently public The Carlyle Group LP (NASDAQ: CG). All shares were sold by holders and Barclays was the sole underwriter for the offering. Perhaps Kinder Morgan should have included more underwriters as shares are down 2.5% at $32.18 on the day against a 52-week range of $23.51 to $40.25.

On Kinder Morgan, Shares are down on the day but still up from the secondary price. The reason that this is good for Kinder Morgan shareholders to have Goldman Sachs and Carlyle affiliates selling shares is a matter of corporate governance.  These two private equity outfits used to hold a considerable stake and this gets Goldman Sachs under 10% (about 9.5% vs. 13%) ownership and it gets the two affiliates listed under Carlyle even further under 10%.

It looks like private equity in general is doing better today with the broader stock market.  Or maybe it is because they can sell stock again… The PowerShares Global Listed Private Equity ETF (AMEX: PSP) is up by 2.5% at $8.40 against a 52-week range of $7.09 to $11.44.

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JON C. OGG

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