KINDER MORGAN BUYOUT PROPOSED

When Richard Kinder left Enron in late 1996 he set out to build an empire out of the staid yet steady energy pipeline business. Nearly 10 years later he plans to take Houston-based Kinder Morgan Inc., where he is chairman and chief executive, private in a $13.5 billion transaction that could be one of the largest such buyouts in U.S. corporate history. Kinder, along with members of his management team, board of directors and a group of investment firms, wants to give Kinder Morgan Inc. shareholders $100 cash for every share, an 18.5 percent premium over KMI's $84.41 closing price on Friday.

The plan, presented to the company's board Sunday, was announced Monday. It's yet another bold move from the hard-driving CEO and shows he and his investment partners believe the market is undervaluing the company. In an interview Monday, Kinder said the management buyout is a way to give shareholders a better return than they have seen in the past six months, when KMI's stock price has fallen from a high of more than $100 to the low $80 range. "At $84.41 investors are saying 'There are risks to these projects so we're putting a heavy discount on it,' " Kinder said, referring to aggressive expansion plans announced in the past year such as building a new natural gas pipeline out of the Rocky Mountains and the $5.6 billion acquisition of Canadian pipeline firm Terasen. "But we're confident we can make these commitments come to fruition. We're willing to take the risk away from the shareholders at what we think is a fair value for their stock."

Kinder, the former chief operating officer of Enron Corp., started what would become Kinder Morgan in early 1997 with Bill Morgan, another former Enron executive. Today the enterprise, which includes three closely tied, publicly traded companies, is worth nearly $24 billion. "We're not a complicated company to understand. We're just a gigantic toll road," Kinder said in explaining why the pipeline company's fortunes don't rise and fall with oil and gas prices. "We just get paid a fee to move products, and we don't care what gets moved down the highway."

There are three publicly traded Kinder Morgan companies: Kinder Morgan Inc. (KMI), Kinder Morgan Energy Partners (KMP) and Kinder Morgan Management (KMR). KMI owns and operates more than 10,000 miles of pipelines, serves more than 1 million natural gas customers in the U.S. and Canada, owns the controlling partnership in KMP and has a 13 percent stake in KMP. These last two assets are expected to account for about 39 percent of KMP's $1.6 billion in projected income for 2006. KMP owns thousands of miles of natural gas pipelines and finished fuel product pipelines, as well as terminals for storing them. KMR's only asset is a stake in KMP.

Analysts have said the decline of KMI's stock price in the past six months has been a source of frustration for the company. Some have said KMI's general partnership stake in KMP is undervalued by investors and that the stock price should be the range of $110 per share or higher. "In addition to the general partnership interest, we believe the market is currently not giving full credit for the expansions coming online from the recent Terasen acquisition," a report by RBC Capital Markets said earlier this year. The buyout would let the new investors reap huge rewards later should those analysts prove to be right. The proposed buyout was presented to KMI's board of directors Sunday and is being reviewed by an independent committee. That committee is expected to hire its own legal counsel and financial advisers to review the deal. If they agree to the proposal it would go to shareholders for approval.

Independent board members reached by phone Monday declined comment. If $7.7 billion in existing debt is included the value of the deal would reach $22 billion. And if approved, the KMI buyout would rank among one of the largest leveraged deals in the country. It would top the 1986 buyout of food maker Beatrice Corp. for $8.7 billion, but fall short of the what is considered the largest buyout ever, the 1989 RJR Nabisco deal that was worth as much as $31.4 billion. Reaction to the proposal won't be clear until today since markets were closed Monday for Memorial Day. The deal shouldn't have a negative impact on the more than 8,300 employees of the Kinder Morgan businesses, the company said.

If the buyout is approved it would not directly impact Kinder Morgan Energy Partners, but KMI said it may sell a portion of a Canadian crude oil pipeline to KMP afterwards. "(The pipeline sale to KMP) will be a source of cash for KMI to use to pay down debt, but it's not a major factor in the total scheme of things," Kinder said. Kinder, co-founder Bill Morgan, board members Fayez Sarofim and Mike Morgan, and as many as seven other members of senior management would contribute about $2.8 billion to the transaction. Most of this would come from converting their KMI stock and options into stock in the new private company. Kinder would provide the lion's share, converting his 24 million KMI shares into $2.4 billion in equity in the new company. Another $4.5 billion in equity would come from Goldman Sachs and GS Capital Partners, AIG Global Investment Group, The Carlyle Group and Riverstone Holdings. Goldman Sachs indicated in a letter to the investors that it expects to be able to secure $14.5 billion in debt financing for the transaction. About $7.7 billion of the debt is existing KMI debt.

VERY interesting. I have a hunch Kinder and Morgan used their knowledge from Enron to leave Enron somewhat high and dry long before Lay and Skilling got blamed for it. It's just my opinion -- so hold the flames. I am of the philosophy that every major profitable firm which can not be outsourced overseas will be private in this country within the next 20 years and no stock will be available to investors. Again, my just IMHO.

SOX 404 Fall out...better to be private in the regulatory hell that's been created Post Enron, Worldcomm, and Global Crossing.

2 posted on 05/30/2006 3:53:32 PM PDT by in hoc signo vinces ("Houston, TX...a waiting quagmire for jihadis. American gals are worth fighting for!")

Good post. Quite interesting, indeed.

Thanks. I believe there is a LOT more here than meets the eye. Oh well, I guess we'll all be dead before an MSM reporter looks into it.

4 posted on 05/30/2006 4:00:32 PM PDT by MeneMeneTekelUpharsin (Freedom is the freedom to discipline yourself so others don't have to do it for you.)

5 posted on 05/30/2006 4:01:41 PM PDT by humblegunner (If you're gonna die, die with your boots on.)

Kinder is the good guy bump.

But, here's another Goldman connection:
"Another $4.5 billion in equity would come from Goldman Sachs"

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