Fleet Financial Group reached a definitive agreement Tuesday with Kohlberg Kravis Roberts & Co. to convert the buyout firm's dual convertible preferred stock in the New England superregional to common stock.
Under the deal, the firm would keep a significant share of the bank holding company but give up an option on a 50% stake in recently acquired banks in Connecticut and Massachusetts. Fleet said the deal would allow it to begin consolidating its purchases.
Kohlberg Kravis will receive 19.9 million shares of Fleet worth $811 million at Friday's price of $40.75 a share. KKR, which now owns 7.5% of Boston-based Fleet, will continue to hold the rights to purchase an additional 6.5 million shares of Fleet common as provided for in the original agreement.
There had been reports last year that Fleet wanted to buy out the firm's position in the bank holding company, but analysts said Tuesday that Fleet's recent agreement to buy Natwest Bancorp, the U.S. unit of National Westminster Bank PLC, made that impossible. Fleet felt it had excess capital, and one of the ways to use that was to buy back the KKR shares," said George Bicher, a bank analyst with Alex. Brown & Sons. "But rather than use it through essentially a share repurchase, it is using the capital for an acquisition."
Under the terms of its 1991 investment in Fleet, the buyout firm already had the right to exchange its convertible preferred into 16.1 million shares of Fleet common. The new arrangement represents a premium of $155 million, or 24%, for the firm.
Analysts spoke approvingly of the deal, on a day in which Fleet's shares were unchanged. "It simplifies their ownership structure," said Anthony R. Davis of Dean Witter Reynolds Inc.
Kohlberg Kravis Roberts obtained its original convertible preferred stock in 1991 in return for a capital infusion of $283 million that Fleet used to purchase the failed Bank of New England.
Speculation had been high last year that Fleet wanted to buy back the buyout firm's shares and put that chapter of its history behind it. So Kohlberg Kravis Roberts' decision to remain a Fleet investor is a tremendous vote of confidence in the bank, said James Moynihan of Advest Inc.
"Over the past four years, we've enjoyed a strong relationship with Fleet and are gratified that our investment has worked so well for both parties," said Henry Kravis, the New York City-based buyout firm's lead partner. "We also believe it is an appropriate time to reinforce Fleet's efforts to consolidate the Shawmut and Natwest acquisitions by completing the exchange and making our interests consistent with those of all Fleet's common shareholders."
For Fleet, the practical benefit of the new arrangement is that it eliminates the buyout firm's right to take a 50% ownership stake in Fleet's nationally chartered Connecticut and Massachusetts banks, which formerly belonged to Bank of New England.
"In a sense what we did was redeem the dual convertible stock by buying out KKR's downward conversion. Now they're sitting there holding company stock," said Fleet's senior vice president and general counsel William Mutterperl.
The 50% ownership arrangement had become a problem for Fleet in later years as it continued to acquire more banks, most recently Boston-based Shawmut National Corp. After completing the pending deal for Natwest Bancorp, Fleet will have $90 billion of assets. The deal is scheduled to close during the second quarter.
Providence-based Fleet currently maintains nationally chartered banks in both Massachusetts and Connecticut.
"We wanted to consolidate everything," Mr. Mutterperl said. "But we ... weren't going to acquire a big bank in Massachusetts and Connecticut from Shawmut and merge it into the KKR banks, because we'd be giving them an interest for free."
Fleet had, for example, recently considered the idea of consolidating its five banks in Massachusetts, Connecticut, and Rhode Island into one bank covering southern New England, but could not do so because of the buyout firm's option on the Massachusetts and Connecticut subsidiaries, Mr. Mutterperl said.
Daniel Kaplan contributed to this article.