(Corrects paragraphs 3, 9, and 10 to specify that acquiring
vehicle and not KKR itself halted payments on debt)
By Tatiana Bautzer
SAO PAULO Oct 12 KKR & Co LP's
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
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,
Auckland, the holding company through which KKR acquired Aceco,
has also halted payments on the bank loans that financed the
deal, infuriating key lender Banco Bradesco, 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
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 Auckland's refusal to service loans on the 1.5 billion
real ($375 million) takeover while arbitration is pending
threatens to weaken KKR's control over Aceco. 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.
The refusal of Auckland, KKR's acquisition vehicle, 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.
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 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
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
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 and Banco Santander Brasil 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
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)