updated 7/28/2008 8:46:14 AM ET 2008-07-28T12:46:14

Private equity firm Kohlberg Kravis Roberts & Co., which gained fame by taking RJ Reynolds private two decades ago, will go public on the New York Stock Exchange through a takeover of its Amsterdam-listed investment fund KKR Private Equity Investors LP.

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The transaction is a big departure from plans announced a year ago by founders Henry R. Kravis and George R. Roberts to tap equity markets for up to $1.25 billion through an initial public offering. Credit market turmoil torpedoed that plan.

Late Sunday, the buyout shop said KKR principals will hold 79 percent of the combined company and KKR Private Equity shareholders will own 21 percent.

No cash will change hands in the deal, which is expected to close in the fourth quarter, and no additional public stock sales are planned. But by having the shares of the combined company trading on the NYSE, KKR said it should have enough cash needed to finance additional takeovers.

The value of the combined company will depend on how KKR Private Equity shares trade in the weeks and months ahead.

KKR Private Equity Investors said in an earnings release Sunday it has 204.9 million units outstanding, giving it a market capitalization of $2.15 billion at the current price of $10.50 per unit. That would suggest a value for the combined company of $10.25 billion.

But in its earnings statement, KKR Private Equity said its net asset value totaled $4.56 billion, or $22.25 per unit, at the end of the second quarter — nearly double its June 30 market price of $12.75. Therefore, KKR said it will make additional payments if KKR Private Equity shares don’t reach a level of at least $22.25 each, which would suggest it values the entire enterprise at more than $21 billion.

KKR Private Equity shares will continue to trade on Euronext Amsterdam until the merger is complete, forecast for sometime in the fourth quarter of 2008. Then the stock will be delisted and listed on the NYSE.

The transaction was unanimously approved by the board of KPE’s general partner, with the deal now subject to approval by KKR Private Equity’s unitholders.

“For KKR, this transaction provides us with additional capital for our business,” Kravis and Roberts said in a statement. “Moving forward with a public listing will allow KKR to do what we do best — grow companies around the world and produce solid returns for our investors from a larger platform and a deeper capital base.”

KKR also said it expects its assets under management at June 30 to be about $60.8 billion, up from $53.2 billion on Dec. 31, 2007.

Citigroup is acting as sole financial adviser to KPE, and Lazard is acting as financial adviser to the independent directors. Goldman Sachs and Morgan Stanley are advising KKR.

Launched by Kravis and Roberts in 1976, the leveraged buyout giant is best known for its $25.1 billion purchase of RJR Nabisco. KKR has been one of the most prolific buyout shops with such deals including TXU Corp. and HCA Inc. When it originally filed in June 2007 in the wake of rival Blackstone Group’s IPO, it had hoped to complete the offering during the third or fourth quarter of 2007.

For investors, such IPOs present rare opportunities to get in on the booming private equity industry — which buys struggling companies, turns them around, and cashes in by taking them public again or selling them to other firms.

But Blackstone’s IPO at $31 a share, raising $4.75 billion from new investors, has been mostly a bust. Its shares now trade at $17.01, meaning investors have lost 45 percent of their initial investment.

KKR’s IPO isn’t looking to raise new capital, but the arrangement with KKR Private Equity gives it access to the fund’s investments at a much cheaper price. And for investors in KKR Private Equity, who have watched shares fall from their initial listing price of $25 to the $10-range, the deal provides assurance that they will recoup some of their investment.

KKR’s move means the pressure will ramp up on investment banks like Morgan Stanley and Goldman Sachs Group Inc., who traditionally finance takeovers, as well as on fellow private equity firms Carlyle Group, TPG Capital and Apollo Management.

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