Apollo-Led Group Buys El Paso Unit for $7.15B

A group led by Apollo Global Management LLC (APO) agreed to acquire El Paso Corp. (EP)’s oil and natural gas exploration business for $7.15 billion in the second-biggest private equity takeover of an energy producer.

Apollo joins Riverstone Holdings LLC, Access Industries Inc. and other investors in the transaction, El Paso said in a statement today. Riverstone, based in New York, invests in the energy and power industries, and Access is the New York-based firm founded by Russian-born investor Len Blavatnik.

The deal is on par with KKR & Co. (KKR)’s $7.2 billion takeover of Samson Investment Co. last year. El Paso’s assets are attractive because of their acreage in the Niobrara field in Colorado and the Eagle Ford and Wolfcamp fields in Texas, which produce more profitable oil and natural gas liquids such as propane and butane, said Raymond James & Associates’ Darren Horowitz.

“All of those areas are, I think, the right place at the right time,” said the Houston-based analyst, who rates Kinder Morgan an “outperform” and doesn’t own the stock.

Buyout firms are vying to expand their energy investments as the world’s biggest energy companies sell mature oil and gas fields to finance new exploration. The oil and gas exploration and production unit was put up for sale to help Kinder Morgan Inc. finance its $21.1 billion purchase of El Paso later this year. Scheduled to close in the second quarter, that transaction is set to create the largest U.S. gas pipeline network.

Debt Financing

Apollo, which is run by founder Leon Black, is planning $5.5 billion of debt financing for the purchase, said three people with knowledge of the transaction. The financing is expected to include $3.5 billion of bonds and a $2 billion loan, said the people, who asked not be identified because the terms are private. About half the loan will be used to fund the buyout, the people said.

“Apollo is acquiring a company with an impressive portfolio of valuable natural resource assets, a talented management team and a remarkable group of highly skilled employees,” Joshua Harris, Apollo’s co-founder and senior managing director, said in a statement today.

Analysts predicted in October that the unit would sell for as much as $9 billion. The lower price translates to about 5.5 times the unit’s earnings before interest, taxes, deductions and amortization, Carl Kirst, an analyst with BMO Capital Markets in Houston, said in an interview. That compares with a median Ebitda multiple of 10.9 for U.S. sales of exploration and production firms in the last 12 months, according to data compiled by Bloomberg.

‘Fair’ Price

The price “looks fair,” said Kirst, who rates El Paso “outperform” and doesn’t own any of its stock. “While their inventory of drillable prospects is more than half oil and is what people are looking for, as far as current production, they’re still 85 percent natural gas.”

Apollo agreed in December to sell Parallel Petroleum Corp., an oil and gas producer based in Midland, Texas, to a group of South Korean companies for $771.5 million. The buyout firm acquired Parallel in 2009 for $483 million.

The value of private equity deals in the energy industry last year almost doubled to $32.2 billion from $16.5 billion in 2010, according to data compiled by Bloomberg. The takeover of Samson Investment, announced in November and completed a month later, was the biggest leveraged buyout of an oil and gas producer.

Crude Prices Climb

Crude prices are up about 13 percent in the past year and rose today to $109.77 a barrel in electronic trading on the New York Mercantile Exchange. Gas prices have dropped 81 percent from their 2008 high, as new drilling techniques have unlocked vast reserves from formations of shale rock.

El Paso gets 96 percent of its production from its U.S. oil and gas fields, including large positions in the Haynesville Shale in Texas and Louisiana and in the Rocky Mountains. The company also has acreage in Brazil and Egypt.

Private equity companies have become attracted to energy investments after BHP Billiton Ltd., the world’s largest mining company, bought Petrohawk Energy Corp. for $12.1 billion, said Mark Hanson, an analyst with Morningstar Investment Services in Chicago. Petrohawk was founded in 2004 and had 3.4 trillion cubic feet of oil and gas reserves when it sold.

Apollo may hold an initial public offering for the newly acquired company in a few years, or sell it to a bigger operator, Hanson said.

“It seems like private equity is drawn to more mature assets and they don’t mind partnering with experienced industry folks,” Hanson said.

Bigger Deals

Apollo participated in two deals larger than the El Paso purchase, joining groups to buy Caesars Entertainment Corp., then known as Harrah’s, for $27.2 billion in 2006 and Intelsat SA for $16.4 billion in 2007. In 2007 Apollo also acquired real estate group Realogy Corp. for $7 billion.

Caesars raised $16.3 million on Feb. 8, selling less than 2 percent of its shares in an initial public offering. Apollo and TPG Capital, which led the buyout in 2008, didn’t plan to sell shares in the offering.

Apollo joined rivals KKR and Blackstone Group LP this month in reporting lower profit as market volatility eroded investment income. The firm, which oversaw $75 billion as of Dec. 31, is seeking investment opportunities in credit and real estate, which tend to deliver more predictable profits than private equity.

‘Damaged Brand’

During an analyst meeting in May last year, El Paso Chief Executive Officer Douglas Foshee said the firm was a “damaged brand” in 2003, citing company scandals related to alleged market manipulation in its energy trading business and restated earnings to correct inflated numbers for its oil and gas reserves. The explorer sold assets to pay down debt and began shifting its focus from energy trading to its pipeline and production businesses, including acquiring acreage in unconventional shale fields, Foshee said.

El Paso announced at the time that it would spin off the exploration and production unit to its shareholders to concentrate the company on the pipeline business and lower its capital spending requirements. Five months later, after agreeing to buy El Paso, Kinder Morgan executives said they would sell the exploration unit rather than continue with the spinoff.

Advisers to the deal weren’t disclosed in Apollo’s statement. Evercore Partners Inc. said it served as the financial adviser to Kinder Morgan and El Paso in the asset sale to Apollo.

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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