Kinder Morgan to buy out minorities in sweeping $70 billion reorganization

August 11, 2014, 9:01 AM UTC

Kinder Morgan-El Paso

At a time when Goldman Sachs was being derided for treating its clients like "muppets," the $21 billion acquisition of rival pipeline company El Paso by Kinder Morgan seemed like yet another datapoint. Goldman advised El Paso on the deal. Yet, Goldman owned nearly 20% of Kinder at the time. Goldman's lead banker, too, was a Kinder shareholder. Goldman's split loyalty, El Paso shareholders later said, resulted in a lower price for their company. A Delaware judge heavily criticized Goldman and El Paso's board of directors for the conflicts of interest, but approved the deal anyway. Kinder ended up paying $110 million to settle the shareholder suit. Goldman had to forgo its $20 million fee.
Courtesy: Kinder Morgan

Kinder Morgan Inc. (KMI) said Sunday it will bring all the assets of its sprawling empire of oil and gas pipelines and storage under one roof in a sweeping reorganization that will create an energy giant worth $44 billion.

The company, which owns 80,000 miles of pipelines and 180 storage facilities across the U.S., said on its website it will offer minority shareholders in its three affiliated holding companies $4 billion in cash and about $40 billion in new shares in Kinder Morgan Inc. that will be publicly traded, effectively scrapping the tax-efficient structures known as “Master Limited Partnerships” that it has used to spectacular effect in exploiting the U.S.’s energy boom.

The deal is the second-largest in the history of the energy sector, after Exxon’s acqusition of Mobil in 1999. In large measure, it’s a response to concerns that the company had outgrown the Master Limited Partnership model, and needed to simplify its financial and organizational structure to carry on growing. Unifying the share structure will enable the company to use its stock as an acquisition currency, while the creation of a single company will enhance the quality of its debt, bringing down borrowing costs.

The combined company will assume around $27 billion in debt held by the individual partnerships, bringing the total transaction value to over $70 billion.Kinder Morgan said that it had talked to credit ratings agencies ahead of the deal and expects its debt to be classed as investment grade.

“In the opportunity-rich environment of today’s energy infrastructure sector, we believe this transaction gives us the ability to grow KMI for years to come,” Chairman and chief executive Richard D. Kinder said in a statement.

The minority shareholders in Kinder Morgan Energy Partners L.P. (KMP), Kinder Morgan Management LLC (KMR) and El Paso Pipeline Partners L.P. (EPC) will receive a premium of 11%, 16.5% and 15.4% on Friday’s closing prices, respectively, for their shares.

Kinder said that KMI shares will likely pay a dividend of $1.72 this year, rising to $2 next year, and by 10% a year for the five years after that.