Richard D. Kinder, the Houston billionaire behind the Kinder Morgan Inc. (NYSE: KMI) empire, announced late Sunday he is combining his pipeline offshoots under one roof. KMI stock soared on the news 15% intraday to a 52-week high of $42.49.
In a series of transactions, KMI will acquire all of Kinder Morgan Energy Partners LP (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR), and El Paso Pipeline Partners LP (NYSE: EPB) for about $40 billion in stock and $4 billion in cash. KMI will also assume $27 billion in debt, bringing the total transaction value upwards of $70 billion.
When combined, the company will be the largest energy infrastructure enterprise in North America. Its cumulative 80,000-mile network of pipelines pieced together would be long enough to circle the Earth three times over.
Upon completion, expected by year's end, only Kinder Morgan will exist. Shareholders of the other three companies will receive a combination of cash and shares at premiums ranging from 12% to 16.5% based on Friday's closing price.
Shares in all four companies gushed higher Monday on the news.
KMP shares surged nearly 25% to a 52-week high of $98.67. KMR shares jumped 23% to a 52-week high of $99.77. EPB shares climbed 24% to $42.50, just shy of their 52-week high of $43.15.
Kinder Morgan is folding the units into one entity amid increasing shareholder pressure. Investors have expressed concerns over the companies' growth prospects, profitability, and complicated financial structures.
The consolidation nicely positions Kinder Morgan to take advantage of some potentially lucrative purchases and expansion projects opened up by the explosive American shale boom.
Indeed, the new Kinder Morgan will boast an estimated enterprise value of roughly $140 billion: $100 billion in market value and $40 billion of debt. That elevates Kinder Morgan's stature, making it the third-largest energy company in the United States, behind only the behemoths Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX).
"This simplifies the structure and will allow us to get to this turbocharged growth," Chief Executive Officer Richard Kinder said in an interview.
The move is also a big deal because it takes Kinder Morgan away from the popular Master Limited Partnership (MLP) structure.
Kinder Morgan (KMI) Leaves Behind MLP Set Up - Others Won't Follow
To be legally classified as an MLP, a partnership must derive most (90%) of its cash flows from real estate, natural resources, or commodities.
The key advantage of an MLP is that it combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. The partnership doesn't pay taxes from profits. The money is only taxed when unit holders receive distributions.
Richard Kinder is credited with pioneering the MLP structure in the late 1990s.
Under Kinder Morgan's existing MLP structure, its units are required to fork over some 40% of their cash to general partners.
But distributions have gotten so large that Kinder Morgan has been lending money to its subsidiaries so that they can fund growth. While a profitable arrangement, it's widely complex and has limited the combined companies' growth prospects.
"It had dragged our cost of equity so high that it was difficult to compete in terms of acquisition opportunities," Kinder commented.
Robert W. Baird analyst Ethan Bellamy told the Wall Street Journal the move is a "very simple and elegant solution to a problem of complexity," adding, "ultimately, this will prove to be a very good deal."
Bellamy, however, doesn't believe other MLPs will follow Kinder Morgan's move. That's because other companies still benefit from and attract investors thanks to the advantages of low taxes and sizable distributions.
Although the Kinder Morgan realm is giving up its MLP advantages, the new combined company is committed to keep shelling out substantial dividends to investors.
KMI's Dividend Growth and Income Tax Savings
Kinder Morgan said the new arrangement allows for heftier dividend growth (about 10% annually through 2020) and bigger income tax savings.
KMI forecasts a dividend of $2.00 in 2015, a 16% increase over the anticipated 2014 dividend of $1.72.
Investors can also expect additional deals, which could further drive distributions.
Richard Kinder, a lawyer and former Enron Corp. executive with a fondness for deal making, founded Kinder Morgan in 1997 with $40 million in Enron cast-off assets.
He took the company private in 2006 in what was the largest management-led buyout of a public company. In 2011, the company debuted again as a public company. In that same year, it bought rival El Paso Corp., making Kinder Morgan the country's largest natural gas pipeline operator.
Kinder will own 11% of the new company. His net worth, estimated at $10 billion, is expected to rise to around $11 billon when the deal is done.
Investors still have solid choices for MLPs in the energy space, like these three...
- Wall Street Journal: Kinder Morgan to Consolidate His Empire