KKR battling over Brazil acquisition with sellers, bank - sources

By Tatiana Bautzer

SAO PAULO (Reuters) - KKR & Co LP's (KKR.N) 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 workings.

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 (BBDC4.SA), 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 timing.

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.

ACCOUNTING FRAUD

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 (PETR4.SA) 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 in Brazil.

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 certain bankruptcy."

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 (ITUB4.SA) and Banco Santander Brasil SA (SANB11.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 loans.

FRAYING TIES

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)

(This version of the story has been corrected in paragraphs 3, 9, and 10 to specify that acquiring vehicle and not KKR itself halted payments on debt)

(Editing by Guillermo Parra-Bernal and Christian Plumb)