Kinder Morgan Judge Urged to Block $44 Billion Buyout

Billionaire Richard Kinder should be blocked from pushing ahead with a $44 billion consolidation of his oil-pipeline empire until he wins the approval of two-thirds of investors in one of the partnerships he’s seeking to acquire, a lawyer argued.

The voting rights of Kinder Morgan Energy Partners LP unitholders, who put money in the pipeline company because of its tax-deferred structure, are improperly altered under Kinder’s offer to acquire the partnership, Nathaniel Orenstein, a lawyer for investors, told a judge. Investors also complain that they’ll face hefty tax bills as a result of the deal.

Kinder Morgan’s arguments that only a simple majority of the partnership’s investors must approve the buyout stem from an “improper reading of the contract” governing the entity, Orenstein told Delaware Chancery Court Judge Travis Laster at a hearing today in Wilmington.

Orenstein wants Laster to block a Nov. 20 shareholder vote until Kinder Morgan officials acknowledge they must win the support of a supermajority of the partnership’s investors. Laster said he’d rule later on the request to halt the vote.

“We believe that plaintiffs’ assertion that the proposed transaction must be approved by a supermajority of KMP’s investors is factually and legally wrong,” Larry Pierce, a spokesman for Kinder Morgan, said in an e-mail after the hearing. The partnership agreement “clearly provides that the proposed transaction is required to be approved by a simple majority of all outstanding units.”

Richard Kinder, 70, is consolidating his pipeline holdings to strengthen his company for growth as the U.S. shale drilling boom opens up $1.5 trillion in potential purchases and expansion. Shareholders in the parent company have been pressuring the billionaire to consolidate, cut costs and increase profits.

24% Stake

He already controls the partnerships through his 24 percent stake in parent company Kinder Morgan Inc. and is seeking to buy out other unitholders. Kinder, a former top executive of the now-defunct Enron Corp., acquired some of his pipelines from the Houston-based company after leaving in 1996.

Analysts say merging the partnerships runs counter to the energy industry trend of spinning off pipelines and oil terminals into tax-advantaged partnerships that funnel cash to investors. By simplifying his empire’s corporate structure, Kinder seeks to reduce borrowing costs and unify the company under a single stock he can use as currency in acquisitions.

Under the proposed deal, Kinder Morgan will acquire all of Kinder Morgan Energy Partners, Kinder Morgan Management LLC and El Paso Pipeline Partners LP in a series of transactions. Kinder’s offer includes $40 billion in shares, $4 billion cash and $27 billion in assumed debt, according to the parent company’s website.

Value Surge

The value of Kinder’s personal holdings in the parent surged by $1.55 billion after the consolidation was announced. His shares in the parent, more than 240 million, make him the largest individual investor in the Houston-based energy firm.

Kinder Morgan officials have defended the deal, saying both the partnerships’ unitholders and the parent company’s shareholders would benefit from the consolidation.

The billionaire’s lawyers said in court filings that Kinder Morgan Energy Partners investors shouldn’t be able to block the vote based on their “myopic reading” of what constitutes an amendment to the partnership agreement.

Kinder’s consolidation push doesn’t amount to an “amendment of the partnership agreement by merger,” Joseph Allerhand, one of the company’s lawyers, told Laster at the hearing today.

Once the merger of the partnerships with the parent is completed, the resulting firm will be the largest energy infrastructure company in North America with an 80,000-mile (129,000 kilometer) network of pipes that together would be long enough to circle the Earth three times.

The case is In Re Kinder Morgan Inc. Unitholders Litigation, Consolidated CA No. 10093-VCL, Delaware Chancery Court (Wilmington).

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