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Kinder Morgan Buyout Attracts Legal Challenges

The management-led buyout of Kinder Morgan Inc. (KMI) sparked a rally in the company's shares (see NGI, June 5). Last week it launched a fusillade of class-action lawsuits that claim shareholders would be stiffed by the $100/share offer, "a grossly inadequate and unfair price."

Lerach Coughlin Stoia Geller Rudman & Robbins LLP and the law office of Charles J. Piven both filed class actions last week. They join the firms of Wechsler Harwood LLP and Bull & Lifshitz LLP, which announced suits previously. Certain officers and directors are charged with violating shareholder rights.

"Instead of attempting to obtain the highest price reasonably available for the company's stockholders, the complaint alleges defendants spent a substantial effort tailoring the structural terms of the acquisition to meet the specific needs of the management buyout group, which includes the company's top officers and directors as well as a group of private equity funds," says a press release from Lerach, et al.

Generally, the suits allege that the buyout offer was timed for when KMI shares were trading around $84, well off their 52-week high price, and in advance of positive news that would have driven the price of KMI shares up.

As owner of the general partner of Kinder Morgan Energy Partners (KMP), KMI gets more money whenever KMP raises its distributions to unitholders. The general partner's (KMI) take also grows whenever more units of KMP are issued. "For every distribution it gives out it gets a piece for itself," industry analyst Robert Lane, vice president of Sanders Morris Harris in Houston, told NGI.

"They're going to have to issue a whole lot more units to finance the Rockies Express pipeline (see NGI, June 5), so that means that the general partner's take is going to get bigger," Lane said. "And so right now while the market's not pricing that into the [KMI] stock, why not go ahead and take advantage of that and buy it and keep more of that for himself [Rich Kinder] and for management."

The proposal, announced May 28, offers $100/share, a premium of about 18.5% over the closing price of KMI stock Friday, May 26. The offer price would give shareholders an average annual return of about 39% since KMI was created July 1999. Trading in KMI shares was nearly 13 times normal volume May 30, the first day of trading following the announcement. Buyout news drove the price up to the $100 area. It has traded as high as $103.75 since the buyout announcement. KMI's 52-week low is $78.55.

The Bull & Lifshitz suit maintains $100/share is too little for KMI because "the intrinsic value of the stock of KMI is materially in excess of $100 per share, giving due consideration to the possibilities of growth and profitability of KMI in light of its business, earnings and earnings power, present and future." The firm's complaint also says "the $100 per share price is not the result of arm's length negotiations but was fixed arbitrarily by KMI to 'cap' the market price of KMI stock as part of a plan for defendants to obtain complete ownership of KMI assets and business at the lowest possible price."

Shortly after the deal was announced, Credit Suisse issued a research note that said, "While we would have hoped for a bit more, we think investors will generally see the $100 proposal as fair, given both the upside involved as well as recognition that interest rate fears over the last three months have eaten into the stock's valuation (recent 'buy rated' price targets have ebbed down, but still remain in the $100-112 range)." Following the deal's announcement some analysts were saying they expected management to sweeten its offer and that the deal would go through.

Kinder Morgan said it does not comment on pending litigation.

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