The Private Side of Kinder Morgan

Sometimes, the buyouts in the energy industry come from within, as Richard Kinder and Bill Morgan have shown by returning Kinder Morgan (NYSE: KMI  ) to private hands.

During the Kinder Morgan conference call last quarter, CEO Richard Kinder indicated that he was looking to add to his 18% stake in the company. This week, he made his move -- as the leader in a group effort to take the company private. Joining the group are co-founder Bill Morgan, members of senior management, board members Fayez Sarofim and Mike Morgan, and investment banking partners GS Capital Partners, AIG (NYSE: AIG  ) , The Carlyle Group, and Riverstone Holdings.

The offer
The group has offered to buy all outstanding shares at $100 per share in cash, which is an 18.5% premium over the closing price as of May 26. The co-founders, managers, and board members will contribute $2.8 billion, mostly through reinvestment of their current stakes in Kinder Morgan. The undisputed leader of this effort is Richard Kinder, who would reinvest all 24 million of his shares for $2.4 billion of the $2.8 billion management stake. The deal will be leveraged with $4.5 billion from the investment-banking partners, plus $14.5 billion of funded indebtedness.

Will the private offering price be enough? Shares of Kinder Morgan are trading for more than $100 today. That implies that someone must think the offer is too low, so I wouldn't be surprised to see a few twists and turns before the deal is done.

The pipeline of profits
Kinder Morgan, referred to as KMI when its various divisions are discussed, will continue to own the general-partner interest of Kinder Morgan Energy Partners (NYSE: KMP  ) . KMP operates 27,000 miles of pipeline and is the largest and fastest-growing asset of KMI. Once private, KMI would likely continue selling pipeline assets to KMP, placing them under the tax-advantaged master limited partnership. KMI would continue to profit from its general partner interest in KMP.

Conclusions
While this offer produces a short-term gain for Kinder Morgan shareholders, it removes their opportunity for long-term capital gains in a company that has been a huge winner. If the buyout goes through, long-term shareholders will have achieved more than 25% annual returns since the creation of KMI in July 1999.

The good news is that investors can still participate in KMP, collect dividends, and look forward to potential growth opportunities. Kinder Morgan Management (NYSE: KMR  ) will continue to offer investors a similar opportunity. Its only assets are shares of KMP, and instead of paying dividends, it pays additional shares, providing an automatic vehicle for dividend reinvestment.

With the activity surrounding KMI today, we will have to wait and see whether the deal goes down. If I were holding KMI shares right now, I'd wait for the final page to turn before letting go.

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Fool contributor Robert Aronen owns none of the companies mentioned in this article.


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