Kinder Morgan buys El Paso, creating natural gas behemoth

Kinder Morgan Inc struck a $21 billion deal to buy rival El Paso Corp, combining the two largest natural gas pipeline operators in North America in a huge bet on the fast-growing market for that fuel.

The cash and stock deal announced on Sunday values El Paso at a 37 percent premium to its Friday market value, and comes as Exxon Mobil Corp and other oil majors are spending billions of dollars to develop and produce shale gas and crude oil in areas with poor infrastructure.

The combined El Paso and Kinder Morgan would own about 80,000 miles of pipe stretching from coast to coast, and could demand higher transport fees from oil and gas producers, which could then raise the prices that power companies and other end users pay for gas.

"Now that KMP is by far the biggest pipeline distributor of natural gas, that will also give them pricing power over the market, which could lead to price pressure to the upside for natural gas," said Chris Jarvis, president and founder of Caprock Risk Management in Rye, New Hampshire.

"We expect this to have a positive impact on the natural gas markets, likely setting the stage for addition mergers and acquisitions in the space."

It was not immediately clear how regulators would view the deal. Kinder Morgan said it expected the deal to close in early 2012.

Despite weak natural gas prices, production of the fuel has been rising as energy companies pile into shale fields -- underground formations rich in oil and gas. In the Eagle Ford Shale in South Texas, where there are scant pipelines, companies are having to rely on trucks and are building rail terminals to handle the vast field's output.

El Paso already owned the largest natural gas pipeline system in North America, with more than 43,000 miles of pipe. The combined company would own 67,000 miles of natural gas pipe and another 13,000 miles of pipelines to move refined products and other fuels.

"We believe that natural gas is going to play an increasingly integral role in North America," Kinder Morgan Chief Executive Richard Kinder said in a statement. "We are delighted to be able to significantly expand our natural gas transportation footprint at a time when it seems likely that domestic natural gas supply and demand will grow at attractive rates for years to come."

Kinder Morgan went public in February after CEO Kinder and private equite partners including Carlyle Group and Goldman Sachs Inc's buyout arm Highstar Capital and Riverstone Holdings took the company private in a management led buyout in 2007.

The private equity firms sold a 13.5 percent stake in the company's IPO, but Kinder and the buyout funds still hold a vast majority of the company.

Split-up derailed

The deal derails El Paso's plan, announced in May, to split into two publicly traded companies, which would have separated its exploration and production business from its pipeline operations. Kinder Morgan said it plans to sell El Paso's exploration and production assets.

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