Kinder Morgan Receives Ultra-Fast FTC Merger Clearance

Energy

Published: August 25, 2014 2:00 pm

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Kinder Morgan Inc. (NYSE: KMI) has already announced that the Federal Trade Commission (FTC) approved an early termination for the Hart-Scott-Rodino waiting period. This waiting period started on August 10, when the company announced that it planned on acquiring Kinder Morgan Energy Partners L.P. (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR) and El Paso Pipeline Partners L.P. (NYSE: EPB).

We would stress that this clearance should have been expected, but the timing here is almost unheard of. While this is not the last regulatory hurdle, and while the deal is still subject to other approvals, getting a clearance from the FTC in only two weeks is far from the norm.

The endgame for Richard Kinder is to unite his family of master limited partnerships (MLPs) under one company. He has gone on the record saying that the MLPs’ main concern is maintaining growth and that in order for his family of companies to continue growing they need to unite.

What exactly will it mean when these Kinders come together? Kinder himself says that the total transaction is worth about $70 billion and is expected to close at the end of 2014.

In a prior presentation on Kinder Morgan’s website, the company offered a pro forma example of a hypothetical new project costing $1 billion, compared with a similar project executed by the current KMP. Assuming a 12% cash return on either project, the cash flow of $120 million would cost KMP unitholders $64 million in new equity, $19 million in new debt and $18 million in the general partner’s share, yielding incremental cash flow of just $18 million to divvy up among unitholders.

The combined companies would have to pay $19 million in taxes that KMP avoids as a master limited partnership, but the cost of new equity drops to $23 million, the cost of new debt drops to $13 million and the general partner share vanishes. Incremental cash flow rises to $65 million.

At the time of the merger, Richard Kinder himself said:

This combined entity will be the largest energy infrastructure company in North America and the third largest energy company overall with an estimated enterprise value of approximately $140 billion. Additionally, we will have a leading position in each of our business segments and operate in the rapidly growing North American energy infrastructure sector.

Again, this merger is expected to close and pass approvals. Still, getting FTC clearance in just two weeks for a deal of this size is much quicker than we would have expected.

The combined company is looking to continue raising its dividends payments. Richard Kinder said that payout would rise to a projected level of $2.00 a share in 2015 from an expected dividend payment of $1.72 this year. He also said that the dividend payout should grow by 10% a year from 2015 to 2020.

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