Compass Point Downgrades KKR Financial Holdings to Neutral from Buy, Raises PT from $12.00 to $12.50

In a report published Wednesday, Compass Point analyst Jason Stewart downgraded KKR Financial Holdings

to Neutral from Buy, raising its price target from $12.00 to $12.50. According to the report, the price target raise represents a modest discount to the purchase price based on KKR's closing stock price on Jan. 7, 2014. The downgrade is due in part to the belief that emergence of competing bidders is unlikely. 4Q13 and 2014 EPS estimates now stand at $0.24 and $1.02. “On December 16, 2013 KFN announced they signed a definitive merger agreement with KKR (Neutral- $16.50 PT),” the report noted. “KKR will acquire KFN in an all stock transaction that values KFN shares at $13.09 (approximately $2.6B and a slight premium to yesterday's close). KFN shareholders will receive 0.51 units of KKR for each common share of KFN. Based on KKR's closing price at the time of the announcement, the valuation represented a multiple of 1.15x September 30, 2013 GAAP book value per share. The transaction is expected to close in 1H14. Given the benefits to KFN shareholders and KKR unit holders, we expect this transaction to close. The emergence of competing bidders seems rather unlikely given the complexity of KFN's portfolio, comparability to a portion of KKR's assets and the price paid. While KFN's asset portfolio, liability structure, and revenue generation capability were impressive, it was equally complex to analyze and a transition to a simpler model would have taken several years to execute.” KFN closed Tuesday at $12.90.