KKR gains Kingston stake in £169m deal

By Andrew Dewson

KKR, the private equity group, became the second-largest shareholder in Kingston Communications yesterday as part of a £169m deal.

KKR, the private equity group, became the second-largest shareholder in Kingston Communications yesterday as part of a £169m deal.

Kingston, for many years the local telephone operator for Hull County Council, is acquiring the data networking firm Omnetica, which was previously owned by KKR.

KKR, founded in 1976, is a management buyout specialist and the largest private equity firm in the world. It owns a wide range of businesses from military aircraft engine manufacturers to children's day care centres, but is perhaps best known for the infamous buyout of RJR Nabisco for $31.3bn in 1989.

Omnetica, based in Hemel Hempstead, brings with it a large number of blue-chip customers, including Ford and Credit Suisse First Boston. The chief executive of Kingston, Malcolm Fallen, said: "This purchase gives us a very comparable skill set to BT on combined data and voice packaging - our two businesses are a great strategic fit."

The purchase of Omnetica marks a change of strategy for Kingston, which has struggled for network customers in the same way that competitors Colt Telecom and Thus have. One analyst, who wished to remain anonymous, said: "I view this development as mildly negative. Kingston now believes it has the scale and attributes to compete with BT and Cable & Wireless - but we will have to wait and see if that is true. It certainly makes Kingston a riskier investment."

The deal also means a significant change of ownership - Hull County Council's stake in Kingston is now reduced to 33 per cent from 41 per

City observers believe that KKR, which takes a 24.6 per cent shareholding as a result of the deal, is likely to sell its holding as it is viewed as a non-core asset, and the council may take the opportunity to exit at the same time.

Up until now it has been politically difficult for the council to sell its stake as it has been the sole large shareholder of a business with many local employees.

For the six months to 30 September, Kingston said it had made a pre-tax profit of £11.2m, up from a loss of £8.7m in the same period last year, based on turnover of £152.8m, up from £148.5m. The company also reinstated its interim dividend, the first time it has paid a dividend since the second half of 2000.

Andrew Darley, of ING Financial Markets, believes that Kingston has paid a fair price for Omnetica. "Equivalent Scandinavian companies have recently sold for much higher multiples and this deal should be extremely positive for Kingston's cash flow. In fact this purchase and today's results are positive in every direction," he said.