Fleet Financial Seeks to Buy Back Stake of Up to $1 Billion From KKR

Fleet Financial Group Inc. wants to buy back a stake worth as much as $1 billion from investment bankers Kohlberg Kravis Roberts & Co., sources close to the companies said.

The buyback would clear an obstacle to Fleet’s $3.7-billion stock swap acquisition of Shawmut National Corp. of Boston, which is expected to close by year’s end.

KKR paid $283 million in 1991 for preferred shares of Providence-based Fleet.

Those shares can be converted into either Fleet common stock or 50% ownership stakes in the company’s Massachusetts and Connecticut bank units.

Fleet spokesman Thomas Lavelle said the banking company is not currently talking with KKR about the stake. He declined to comment further.

KKR’s investment helped Fleet finance its 1991 purchase of the bank units of failed Bank of New England Corp. Since then, Wall Street has speculated over the extent of KKR’s involvement in the banking company.

KKR’s stake in Fleet is convertible into 22.5 million shares of Fleet common stock, or 14.1% of common stock outstanding at the end of 1993.

That stake includes rights to buy 6.5 million Fleet common shares for $17.95 each.

To exercise its conversion rights, KKR would have to put up another $116 million, a source familiar with the transaction said.

Fleet’s share price fell $1.125 to close at $37.25 on Friday. At that price, KKR’s stake would be worth $838 million.

KKR could also convert its preferred stock into a 50% stake in Fleet’s Massachusetts and Connecticut bank units.

The half-interest in the banking units could be worth as much as $150 million more to KKR than an equity stake in Fleet, investment bankers said.

That possibility is one reason Fleet wants to buy out New York-based KKR, an investment banker familiar with the transaction said.

Fleet has retained Merrill Lynch & Co. to advise it in negotiating the sale, a source said. KKR declined to comment.

To pay for KKR’s stake, Fleet could issue debt or other securities, use retained earnings or sell part of its investment securities portfolio.