Kinder Morgan to Buy El Paso for $21B

By Mike Lee and Zachary R. Mider - Oct 17, 2011 12:43 PM GMT+0700

Kinder Morgan Inc.’s agreement to buy El Paso Corp. (EP) for $21.1 billion, the energy industry’s biggest transaction in more than a year, would create the largest natural-gas pipeline network in the U.S.

The cash and stock offer is valued at $26.87 per El Paso share, or 37 percent more than the Oct. 14 closing price, Houston-based Kinder Morgan said in a statement yesterday. The combined company would have 67,000 miles (107,000 kilometers) of gas lines and eclipse Enterprise Products Partners LP (EPD) as the biggest U.S. pipeline operator.

The transaction strengthens Kinder Morgan’s position as a major player in the U.S. gas industry, providing the infrastructure to transport growing production from new fields to new markets. Chief Executive Officer Richard Kinder is making a bet that the need for pipelines will continue to grow, said Bill Herbert, an analyst at Simmons & Co. International in Houston.

“Rich Kinder continues to make history by shaping and redefining the North American energy landscape,” Herbert said. “And he is, once again, likely making the wise bet.”

Kinder, 66, will be chairman and CEO of the combined company. The acquisition, once closed, would create immediate shareholder value because of its cash flow, he said in a statement yesterday.

Barclays Plc agreed to lend Kinder Morgan the entire $11.5 billion cash portion of the bid, the statement said. Kinder Morgan’s current debt is held by its Kinder Morgan Kansas subsidiary and is currently rated “BB” by Standard & Poor’s, two notches below investment grade.

Selling E&P

The total value of the acquisition, including debt assumed from Houston-based El Paso, is $37.8 billion, Kinder Morgan said in a document prepared for investors.

The acquisition is the largest ever proposed of a pipeline company, surpassing the 2007 leveraged buyout of Kinder Morgan itself by a group including Kinder and Goldman Sachs Group Inc. If completed, it will be the ninth-largest takeover in the global energy industry and the biggest in more than a year, according to data compiled by Bloomberg.

Kinder Morgan said it will try to sell El Paso’s exploration and production business. Evercore Partners Inc. (EVR) and Barclays are advising Kinder Morgan on the effort, which may reap $6 billion or more, said a person with knowledge of the matter.

El Paso had announced in May that it would spin off the unit to its shareholders. As a stand-alone company, the business, known as EP Energy Corp., had $374 million of net income in 2010, El Paso said in an August regulatory filing.

Offer Details

For each El Paso share, Kinder Morgan is offering $14.65 in cash, 0.4187 share of Kinder Morgan, and 0.64 Kinder Morgan warrant, which allows the holder to buy a Kinder Morgan share at $40 within the next five years, the statement said.

The takeover values El Paso at about 13 times the last 12 months’ earnings before interest, taxes, depreciation and amortization of $2.67 billion, according to Bloomberg data. That compares with the 14 times Ebitda that Dallas-based Energy Transfer Equity LP (ETE) agreed in July to pay for Southern Union Co. (SUG), based in Houston, and the 27 times Ebitda that Richard Kinder and his co-investors paid to take his company private in 2007, the data show.

Growing Networks

Pipeline companies have been expanding their networks over the last few years to move growing U.S. production of natural gas, said Dan Spears, a fund manager at Swank Capital LLC in Dallas. More pipelines are needed to move gas to new markets, particularly for power generation, and to accommodate supplies from new gas fields such as the Marcellus Shale, Spears said.

Energy Transfer’s $5.1 billion bid for Southern Union is one such effort to gain access to new markets in Florida and the U.S. Midwest.

The El Paso acquisition will establish Kinder Morgan “as the pre-eminent pipeline company in the United States,” and will provide operational savings and increased cash flows, Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago, said in a telephone interview yesterday. Bern said she owns units in Kinder Morgan Energy Partners LP (KMP), an associated master limited partnership.

Kinder approached El Paso CEO Douglas Foshee at the end of August with a takeover proposal, Joe Hollier, a spokesman for Kinder Morgan, said in an e-mail. That was about three months after Foshee announced the plan to spin off El Paso’s exploration and production assets.

Billionaire Investor

Two prominent shareholder activists may have profited from the El Paso transaction. Billionaire investor Carl Icahn held about 58.3 million shares as of Aug. 5, or about 7.6 percent of the company’s stock, according to a regulatory filing. That made him the company’s largest shareholder, according to data compiled by Bloomberg.

Barry Rosenstein’s Jana Partners LLC held 24.2 million shares as of June 30, the data show.

El Paso didn’t seek competing bids for the company because it wanted to preserve its spinoff option in case the merger talks collapsed, a person with knowledge of the talks said. Under U.S. tax rules, holding discussions with potential buyers prior to a spinoff might imperil the tax benefits of the transaction if the division is later acquired.

Enron Corp.

Richard Kinder formed Kinder Morgan after leaving Enron Corp. before the company went bankrupt in 2001.

In 2007, Kinder Morgan Inc. went private in a transaction valued at $22 billion. Kinder Morgan Energy Partners LP remained publicly traded. Kinder took the parent company public again with an IPO in February for 13 percent of its shares, which raised $2.9 billion.

Kinder Morgan fell 3 cents to $26.89 in New York on Oct. 14, a 10 percent decline from its IPO debut. El Paso shares rose 2.3 percent to $19.59 in New York on Oct. 14 and had increased 42 percent so far this year.

Kinder Morgan and El Paso said they expect their deal to close in the second quarter of 2012, creating the fourth-largest energy company in North America.

“This once in a lifetime transaction is a win-win opportunity for both companies,” Kinder said.

Evercore and Barclays served as financial advisers for Kinder Morgan; Weil Gotshal & Manges LLP and Bracewell & Giuliani LLP acted as legal advisers.

Morgan Stanley acted as financial adviser for El Paso; Goldman Sachs Group Inc. (GS) was advising El Paso on its previous spinoff. Wachtell, Lipton, Rosen & Katz was El Paso’s legal adviser.

Enterprise Products, which will become the second-largest U.S. pipeline operator after the transaction closes, has about 50,000 miles of pipeline.

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net