With Kinder Morgan Energy Partners' (KMP) Rockies Express pipeline project under way and its own shares trading at a discount, now is an opportune time for Kinder Morgan Inc. (KMI) management to take the company private, an industry analyst told NGI.
KMI CEO and co-founder Richard Kinder is doing just that. He's leading a management group and investment partners in a plan to take KMI private in a $22 billion deal that values the company at about $13.4 billion, according to estimates. It's the largest management-led buyout ever and one of the largest leveraged buyouts.
As owner of the general partner in master limited partnership KMP, KMI stands to gain handsomely as KMP issues more units in order to finance the mammoth Rockies Express project, said Robert Lane, vice president of Sanders Morris Harris in Houston. That's because of how the master limited partnership (MLP) structure works, he explained. KMI owns about 15% of KMP, but it is entitled to 55 to 60% of KMP's total cash flow. "That's because of its ownership of the general partner and the very high distribution rate that it has relative to the distribution rate structure," Lane said.
As owner of KMP's general partner, KMI gets more money whenever KMP raises its distributions to unitholders. The general partner's (KMI's) take also grows whenever more units of KMP are issued. "For every distribution it gives out it gets a piece for itself.
"They're going to have to issue a whole lot more units to finance the Rockies Express pipeline, 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 [Richard Kinder] and for management."
The proposal, announced Sunday, 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 the normal volume midday Tuesday when the share price was $100.96.
The proposed deal, which has yet to go before a KMI management committee, comes at a time when Wall Street is awash in private equity money and KMI's share price has been well off a 52-week high of $101.44.
"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)," wrote Credit Suisse analysts in a research note.
Credit Suisse cut its price target on KMI to $100 from $110, saying upside from a revised buyout proposal is possible but not likely. The firm also said in a research note that it does not expect interlopers. "This is an engaged management team not looking to exit, has 21% of the shareholder vote locked and operates in a highly complex corporate structure. As such, we see no feasible/hostile M&A suitors that put KMI into play."
"The deal goes through," Lane told NGI, but the price is more likely to be $105-$110/share. "There's not another buyer out there who's going to get the support of the institutions. And certainly Rich is not going to sell his [share] to a third party."
Bill Morgan, KMI co-founder, current board members Fayez Sarofim and Mike Morgan, and investment partners Goldman Sachs Capital Partners, American International Group Inc., The Carlyle Group and Riverstone Holdings LLC are backing Richard Kinder.
Goldman Sachs is no stranger to energy, a major trader, the firm also has invested in start-ups, including Rockies player Bill Barrett Corp. (see Daily GPI, Dec 8, 2004), and Cobalt International Energy LP (see Daily GPI, Dec. 2, 2005), which is targeting the deepwater Gulf of Mexico.
The proposal offers $100/share cash for all outstanding KMI common stock. Richard Kinder, who would remain chairman and CEO, would reinvest all of his 24 million KMI shares. Combined, KMI management and the participating board members would be investing nearly $2.8 billion in the deal, and the financial sponsors would provide the remainder of the required equity. The value of the purchased equity, together with the debt that would be either refinanced or remain outstanding is about $22 billion.
"Under our proposal, the senior management team would remain intact to help lead our enterprise into the future, and it would be business as usual for our valued employees, who are responsible for our success," Richard Kinder said in a statement. "We look forward to working with the KMI board of directors and hope that a merger agreement can be reached in the near future."
KMI owns the general partner of and other partnership interests in Kinder Morgan Energy Partners (KMP). KMP is KMI's largest and fastest growing asset and one of the largest pipeline master limited partnerships in the United States.
Standard & Poor's warned that ratings on KMI/KMP could be cut to junk because of the amount of leverage the buyout deal entails. "The sharp increase in debt contemplated in the KMI buyout offer would likely lead to a multiple notch ratings downgrade into the 'BB' category," said S&P credit analyst Todd Shipman. "KMP is not directly involved with the proposed transaction, but its ratings are currently closely tied to KMI's credit quality and would probably be affected by any rating action on KMI."
S&P placed its 'BBB' long-term corporate credit rating on KMI and subsidiaries and its 'BBB+' long-term corporate credit rating on KMP on CreditWatch with negative implications. S&P also placed its 'A-2' short-term corporate credit rating on KMI on CreditWatch, negative, but affirmed its similar rating on KMP.
KMP is the largest independent owner/operator of products pipelines in the country, moving more than 2 million bbl/d of gasoline, jet fuel, diesel, and natural gas liquids through more than 10,000 miles of pipeline. The company has 15,000 miles of natural gas pipelines with 8.4 Bcf/d of capacity, gathering, treading, processing and storage are included as well. KMP's terminals business is the largest in the country with throughput of more than 60 million bbl/d of petroleum and chemical products. It handles more than 60 million tons of dry bulk commodities annually at more than 190 terminals. KMP also is the largest marketer of carbon dioxide (CO2) in the country. It moves and markets more than 1 Bcf/d through more than 1,100 miles of pipelines. The CO2 is used for enhanced oil recovery. The division also owns a crude oil pipeline in the Permian Basin.
Kinder said that KMP would directly benefit in two ways from the deal to take KMI private. "First, this transaction would enable a new crude oil hedging facility to be implemented for the CO2 business segment that would lock in $1.5 billion in proceeds from future crude sales without requiring the posting of margin. Second, upon completion of the transaction, KMI would offer KMP the option to acquire the Trans Mountain Pipeline and its future expansion opportunities at an attractive price, subject to KMP board approval."
KMI picked up the Trans Mountain Pipeline when it acquired Terasen Inc., formerly BC Gas, for US$5.6 billion (see Daily GPI, Aug. 2, 2005). A deal that would move Trans Mountain from KMI to KMP would be "a great trade" for KMI, Lane said. Basically, KMP would pay KMI for 100% of the value of Trans Mountain, but KMI also would get 60% of the cash flow from the asset. "They'd end up paying for about 85% of the value," Lane said. "KMI still ends up with 60% of the cash flow. So it's a great trade for them.
"I think they're going to end up selling Trans Mountain down [to KMP], which will give them debt relief. And I think it's also likely that they might sell Terasen Gas, the LDC, [to a third party]. That's not really a growth vehicle there.
In April, Richard Kinder told analysts that "it's a very good time to be in the natural gas transportation business" during an earnings webcast (see Daily GPI, April 21). "In our 10 years of existence this is the best quarter we've had in development and finalizing of new projects." Leading the pack is "the biggest single project we have ever had," the 1,300-mile Rockies Express to carry natural gas to eastern Ohio and beyond (see Daily GPI, March 1). Kinder put the total cost of the project, including the purchase of Entrega Pipeline from EnCana, at $4.4 billion. Entrega has changed its name and now is a part of Rockies Express. If approved by FERC, the $3 billion, up to 42-inch diameter Kinder Morgan-Sempra gas pipeline to carry Rockies gas eastward to Ohio would be the largest built in the United States in more than 20 years.
Kinder, a lieutenant to Ken Lay when both were at Enron, left the yet-to-be disgraced company in 1996 after growing uncomfortable with its "asset light" strategy. He and Morgan picked up some Enron assets and with other acquisitions, including KN Energy, built Kinder Morgan into what it is today.
Last week, Lay was found guilty of one count of conspiracy, three counts of securities fraud, two counts of wire fraud, three counts of making false statements to banks and one count of bank fraud (see Daily GPI, May 26). Last year, Kinder ranked No. 93 on the Forbes Rich List with a net worth estimated at $2.5 billion.
Said Lane: "Rich [Kinder] is a very smart guy."
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