In the largest-ever private equity takeover of a pipeline company, Houston-based transportation giant Kinder Morgan Inc. (KMI) agreed Monday to be bought by a group of investors led by founder and CEO Richard Kinder for $15 billion plus the assumption of close to $7 billion of debt.

Under terms of the agreement, set to close in early 2007, stockholders will receive $107.50 in cash for each of their shares — a 27% premium to the $84.41 closing price on May 26, the day before the investor group proposed taking the company private (see Daily GPI, May 31). KMI shares closed Friday at $101.70; at midday on Monday, the price had risen to $104.22. The deal includes a $215 million break-up fee.

KMI’s independent board of directors unanimously agreed to the transaction and has urged shareholders to accept the terms.

Along with Kinder, the investor group includes KMI cofounder Bill Morgan and board members Mike Morgan (Bill Morgan’s son) and Fayez Sarofim. The investor group also includes private equity muscle: Goldman Sachs Capital Partners, American International Group Inc. (AIG), The Carlyle Group and Riverstone Holdings Inc. and certain affiliates that principally include AIG Financial Products and AIG Highstar Capital.

“We are proud to partner with this prominent group of private equity firms, all of which have proven records of success,” said Kinder. “They share our goals and will be strong partners moving forward. I also want to thank our 8,300 employees for their efforts and the company’s success and assure them that we will continue to focus on incentive programs that enable them to share in the company’s future accomplishments.”

Kinder, who would continue as chairman and CEO following the close of the transaction, plans to reinvest all of his 24 million KMI shares (18% of the company), which are valued at about $2.58 billion. “This buyout reflects the confidence that senior management and the sponsors have in the potential of Kinder Morgan Energy Partners LP,” its master limited partnership, which is the company’s largest asset, he said.

Kinder resigned from Enron Corp. in 1996 following a dispute with Enron Chairman Kenneth Lay, and he has been CEO of KMI for seven years. He and Bill Morgan founded KMI in 1997 as a spin-off of Enron’s gas liquids operations, which at the time were worth about $40 million. Subsequently the company merged with KN Energy in 1999, which at that point included the crown jewel, Natural Gas Pipeline Co. of America. The company today employs many former Enron employees. Kinder, a well-known Republican donor and close friend to President George Bush, likes to boast that he pays himself only $1 a year, with dividends from the company fueling his lifestyle.

The company controls a North American oil and gas pipeline network of about 43,000 miles that transports primarily natural gas, along with crude oil, petroleum products and carbon dioxide. It also owns about 150 storage terminals, and it provides natural gas distribution service to more than 1.1 million customers. Kinder has built much of the company through smaller acquisitions of hard assets, shunning the business model built by Enron in favor of cash flow-rich pipelines and midstream assets.

The company began branching out last year when it bought Canadian pipeline giant Terasen for $5.6 billion, giving it access to northern oil sands development, which is expected to double over the next 10 years (see Daily GPI, Aug. 3, 2005). Also KMP, Sempra Energy and ConocoPhillips have teamed up to build the Rockies Express, a $4 billion, 1,300 gas pipeline linking Rockies gas to eastern markets (see Daily GPI, Aug. 23; Aug. 18, 2005). The project, once completed, will be one of the largest new domestic pipelines built in more than 20 years.

UBS energy analyst Ronald Barone wrote, “With Rich Kinder reinvesting all of his 24 million KMI shares and private equity firms investing roughly $3 billion in equity, we feel this underscores the value of stable, energy infrastructure assets in the U.S.”

The KMI takeover will be the third-largest private equity buyout in 17 years. In 1988, RJR Nabisco Inc. was bought out by Kohlberg Kravis Roberts & Co. for $25.10 billion, and last month, HCA Inc. was bought out in a $21.22 billion deal involving Bain Capital LLC, Kohlberg Kravis and Merrill Lynch Global Private Equity.

Following the announcement, Standard & Poor’s Ratings Services (S&P) affirmed KMI’s “BBB” corporate credit rating and affirmed its “BBB+” corporate credit rating and other long-term ratings on KMP. However, both entities remain on “CreditWatch with negative implications,” where they were placed in late May.

“At KMI, a large increase in debt is anticipated to fund the buyout and will likely lead to a ratings downgrade well into the ‘BB’ category,” S&P noted. “KMP, while not directly involved in the buyout, will also be affected by any rating action on KMI because of its business and financial ties to the sole owner of its general partner. However, KMP’s ‘A-2’ CP rating was affirmed based on the strong possibility that steps will be taken at the partnership to substantially insulate KMP from KMI.”

The transaction will be financed by a combination of equity contributed by the investor group and debt financing provided by Goldman Sachs Credit Partners LP and affiliates of Citigroup Global Market Inc., Deutsche Bank Securities Inc., Wachovia Securities and Merrill Lynch, Pierce, Fenner & Smith.

Morgan Stanley and The Blackstone Group LP are acting as financial advisers to the board’s special committee, and they have each delivered a fairness opinion. Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal adviser to the special committee. Bracewell & Guiliani LLP is acting as legal adviser to the independent directors.

Goldman Sachs is acting as financial adviser to the investor group. Wachtell, Lipton, Rosen and Katz is acting as legal adviser to the private equity investors, and Weil, Gotshal and Manges LLP is acting as legal adviser to Richard Kinder and the other management investors. Simpson Thacher & Bartlett LLP is acting as legal adviser on the financing to the investor group.

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