Kinder Morgan Signs Off On $22B Deal

Three months after receiving a taking-private proposal from a private equity consortium, Kinder Morgan went ahead and signed the agreement that will likely see the energy giant sold in a $22 billion deal. Goldman Sachs, American International Group (AIG), The Carlyle Group and Riverstone Holdings, along with key members of the company’s management, will buy Kinder Morgan for $15 billion in cash and the assumption of approximately $7 billion of debt.

The agreement’s selling price of $107.50 per share is a significant jump from the initial proposal, which offered $100 per share. Lawsuits were threatened and filed by disgruntled shareholders who thought the initial proposal fell short of the company’s value. The purchase price is a 27% premium over the closing price of Kinder Morgan’s stock the day before the initial agreement was announced in late May. Goldman Sachs Credit Partners, Citigroup Global Markets, Deutsche Bank Securities, Wachovia Securities and Merrill Lynch are providing debt for the deal.

Company Co-founder and former Enron executive Richard Kinder, who is company chairman and CEO, has led the deal and owns 24 million shares, an 18% stake in the company. He is joined by company Co-founder Bill Morgan and current board members Mike Morgan and Fayez Sarofim. The deal will leave the company’s management team in place, and Richard Kinder has said publicly that he intends to reinvest his 24 million shares back into the deal.

The company’s board of directors approved the agreement after a report from a special committee of independent directors unanimously endorsed the deal. The deal is still subject to shareholder approval, and the company expects the transaction to be completed by early 2007. The agreement comes with a $215 million termination fee.

Since the proposal was first announced, the Kinder Morgan buyout went from being the second-largest buyout in history to the third. In a deal scheduled to close in the fourth quarter, Bain Capital, Kohlberg Kravis Roberts & Co. (KKR) and Merrill Lynch have agreed to acquire hospital operator HCA Inc. for approximately $33 billion, a price that includes $11.7 billion of debt. The HCA deal eclipsed KKR’s 1989 buyout of RJR Nabisco for $25 billion.

The propensity and visibility of these mega take privates has aroused a chorus of critics, and increasingly buyout shops are encountering difficulty in wooing shareholder approval. (KKR and Apax Partners were recently spurned in their efforts to take Signet Group private.)

Analysts who follow Kinder Morgan agreed that the deal would go through, but with a higher price per share than the initial $100-per-share offer. In a report issued several days after the initial announcement, Sanders Morris Harris Analyst Robert Lane noted that while the price offered for the company was 18% above its share price at the time of the offer, it was below the company’s most recent high point in stock price and below the price target of many analysts. Lane predicted correctly that the company would price higher in the end, at a point between $105 and $110 per share.

Richard Kinder and Bill Morgan founded Kinder Morgan in 1997 using natural gas assets that the pair had purchased from Enron. The company now operates approximately 43,000 miles of natural gas, oil and other pipelines, and is building a large natural gas pipeline across the continental United States, from Colorado to Ohio. Kinder Morgan expects the pipeline, which it calls the Rockies Express, to be in service by this December. —M.S.