Kinder Merger Drives $16 Billion Market Boost, More Deals

Pipeline companies listen up. Richard Kinder wants you.

The Texas pipeline billionaire, having freed up billions of dollars to spend in an audacious $71 billion consolidation within his Kinder Morgan Inc. unit, suggested his immediate targets will be rival pipeline operators.

Booming exploration and production in shale formations across North America have spurred demand for pipelines, storage terminals and other infrastructure to process and carry crude and natural gas. “I think it’s a fertile field to do a little grazing,” the 69-year-old University of Missouri trained lawyer said.

There are more than $875 billion of targets to choose from, he said. MarkWest Energy Partners LP and Targa Resources Corp. may be prime buyout candidates.

“There are a lot of growth opportunities,” Sunil Sibal, an analyst at Global Hunter Securities LLC in New York, said in a phone interview. MarkWest and Targa are “probably the best ways to play it,” he said. Energy Transfer Equity LP also may be on the hunt after its plan to buy Targa broke down in June.

MarkWest processes and transports natural gas from U.S. shale basins including the Marcellus and Utica. Targa has a footprint in the Permian and Bakken, as well as one of the Gulf Coast’s two commercial export terminals for natural-gas liquids.

“They’ve got assets which are very desirable in the current production growth environment,” Sibal said.

Representatives for Denver-based MarkWest and Houston-based Targa didn’t respond to phone calls seeking comment.

Market Response

All but one stock in the 50-member Alerian MLP Index of pipeline and storage operators climbed yesterday, creating $16 billion of shareholder value in a single day, in part because of takeover speculation. MarkWest’s shares gained 7.4 percent, giving it a market value of $14 billion. Targa Resources and Targa Resources Partners LP, its operating unit, both rose more than 2 percent for a combined market value of almost $14 billion.

The Kinder Morgan transactions add fuel to a flurry of pipeline mergers and acquisitions, boosting overall deal activity in the energy sector to the busiest in more than a decade. Mergers and acquisitions of North American energy companies surged to about $211 billion, the highest volume for a 12-month period since at least 2002, according to data compiled by Bloomberg.

‘Active Space’

“This has been a very active space and it’s likely to continue,” Shneur Gershuni, an analyst at UBS AG in New York, said in a phone interview. “Sometimes it’s about synergies and making assets attach to each other that make sense. Sometimes you’re buying growth. In this scenario here, it’s to uncomplicate the structure, and more importantly to bring down the cost of capital.”

Kinder is consolidating Kinder Morgan Energy Partners LP, Kinder Morgan Management LLC and El Paso Pipeline Partners LP, bringing together four entities that together control a pipeline network long enough to circle the Earth three times. The move creates the biggest energy infrastructure company in North America. Kinder personally netted an $800 million gain yesterday in the value of his holdings in the companies.

The transactions will free up billions of dollars for expansion projects and dividend payouts, while unifying operations under a single stock that can be used as currency in acquisitions, Kinder told investors yesterday. Transactions that he skipped in the past because he couldn’t make money on them now may be desirable to pursue, he said.

Missed Opportunities

“There are certainly a number of opportunities where we haven’t been able to play in the past because we just couldn’t make our hurdle rate for making a successful investment,” Kinder said during yesterday’s conference call. “When you lower the hurdle rate significantly, yeah, that gives you opportunity to make more investment.”

The combination will restore investor faith in the Kinder Morgan family after three years of lagging performance and stalling growth, Jason Stevens, an analyst at Morningstar Morningstar Investment Services Inc., said in a phone interview. A cumbersome aggregation of inter-related entities will become streamlined, focused unit with plenty of cash to grow and reward investors, he said.

“The math works and it’s actually a pretty savvy deal,” Stevens said. “Once again, Rich Kinder pulls a rabbit out of a hat.”

Deal Value

Kinder, who already owns 24 percent of Kinder Morgan Inc., plans to take stock in lieu of cash for his stakes in the sister companies that are being merged in the transactions, which includes $40 billion in stock, $4 billion in cash and $27 billion in assumed debt. The deal is expected to be completed by the end of this year.

Kinder said potential acquisition targets include more than 120 energy-focused master limited partnerships, or MLPs, that have a combined enterprise value of $875 billion. There also is ample room to grow through new projects as expanding shale exploration and production spurs the need for $640 billion in new pipelines and storage tanks through 2035, according to a presentation published on the company’s website when the consolidation was announced on Aug. 10.

“The shale plays are creating tremendous opportunities” for pipeline and storage operators, said Kevin McCarthy, managing partner at Kayne Anderson Capital Advisors LP, which owned more than $1.75 billion worth of shares in Kinder Morgan companies based on closing prices on Aug. 8. “Rich is at the forefront of the midstream players and it was just hard for us to imagine that Rich would sit on the sidelines” and let those investments pass by.

MLP Trend

Kinder declined through a spokesman to be interviewed.

The consolidation runs counter to the industry trend of spinning off pipelines and oil terminals into tax-advantaged partnerships that funnel cash to investors. Kinder told investors and analysts yesterday that his move was in no way a “verdict” against the so-called MLP model and that the combination was driven by circumstances unique to Kinder Morgan.

The transactions are the latest evolution in Kinder’s odyssey that began 18 years ago when he quit Enron Corp. to strike out on his own. The company’s rapid expansion and splintering into multiple entities had become more of a burden than a boon in recent years as the partnership structure siphoned off cash for investors that the company needed to grow.

Pipeline companies are spending on both organic growth and acquisitions to take advantage of the shale boom. Kinder Morgan referred to it as a toll road-like model in which it charges fees for usage of its pipeline network in transporting fuel to markets.

“The next four years, we’ll see a lot of robust organic spending,” said Morningstar’s Stevens. “But as we step beyond that, you’re looking at an investment opportunity set that begins to slowly diminish year over year, so consolidation will be key.”

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