Kinder Morgan buys El Paso, creating natural gas behemoth
Kinder Morgan purchased rival pipeline operator El Paso Corp for $21 billion, creating what will be by far the country's largest pipeline distributor of natural gas.
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The $26.87 per share offer consists of $14.65 in cash, 0.4187 Kinder Morgan shares -- valued at $11.26 per EP share -- and 0.640 Kinder Morgan warrants -- valued at $0.96 per EP share -- based on Kinder Morgan's closing price on Friday.Skip to next paragraph
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The warrants will have an exercise price of $40 and a five-year term.
Including El Paso's debt, the deal tops $38 billion, making it the second biggest merger in 2011 behind AT&T Inc's $39 billion deal to buy Deutsche Telekom's T-Mobile USA, according to Thomson Reuters data.
Kinder Morgan said it has a commitment letter from Barclays Capital underwriting the $11.5 billion in cash required for the transaction.
The deal also highlights the advantages that energy infrastructure companies have gained in recent years by using a financial structure known as master limited partnerships (MLPs), which pay no corporate taxes but distribute the lion's share of their profits to invsetors and the general partner through dividends.
Companies like Kinder Morgan -- which owns nearly all of its assets through its MLP, Kinder Morgan Energy Partners -- have a tax advantage over their competitors and have also received higher valuations from investors.
This gives it a financial leg up over a company like El Paso, which still holds a substantial amount of its assets outside of its MLP, El Paso Pipeline Partners.
"It's not a coincidence at all that the two big pipeline deals done this year have been by big MLPs with decelerating growth. Their general partners have gone out and snagged undervalued pipeline assets," Olsen said.
Moreover, Kinder Morgan said it plans to pay down much of the substantial amount of debt it is picking up from the takeover by selling off El Paso's assets to its MLPs.
The new company hopes to generate $350 million a year in cost savings, or about 5 percent of the combined companies' earnings before interest taxes, depreciation and amortization. Kinder Morgan expects to be able to increase its dividend after the deal closes due to these savings.
It said that if the deal were to close at the beginning of 2012, it would expect to be able to pay a dividend of about $1.45 a share that year. But because it expects the deal to close later, it said its dividend will likely be slightly below that target.
Evercore Partners and Barclays Capital advised Kinder Morgan on the deal, while Morgan Stanley advised El Paso. Goldman Sachs acted as an adviser to El Paso on its previously announced spin-off and related matters to the Kinder Morgan deal, the companies said.
The advisors are set to rake in a total of $100 million to $145 million in M&A fees, according to Freeman & Co.