Kinder Morgan: pipe dreamer

With the benefit of hindsight, the smartest guy in the room was no longer working at Enron when things were unravelling a decade ago. Rich Kinder’s penchant for hard assets rather than financial alchemy had transformed him from heir apparent to outcast five years earlier, but he was allowed to snap up $40m of unwanted assets along with friend Bill Morgan. Now his vindication is nearly complete as the company they built, Kinder Morgan, bids $38bn for El Paso to create America’s largest owner of energy infrastructure and its fourth largest energy group overall.

Of course the deal itself will make use of some nifty financial engineering, but all of it above board and much through exploiting tax rules rather than investor gullibility, in sharp contrast to Mr Kinder’s one time college buddy Ken Lay. The 37 per cent premium in a combination of cash, shares and warrants can be justified by more than usual deal synergies, estimated at about 6 per cent of the premium paid per annum.

El Paso’s tax losses will be harvested, its energy production assets sold to repay debt and much of its pipeline and other hard assets “dropped down” into master limited partnerships allowed to pass through income untaxed to unit holders. With US oil and gas transport infrastructure requiring $255bn in investment over the next quarter century, according to the Interstate Natural Gas Association of America, threats to repeal these tax advantages appear empty.

That still leaves two question marks for a deal Mr Kinder confidently calls a “win-win”: will it be hurt by regulatory complications and will others bid for all or part of El Paso too? Energy Transfer’s bid for Southern Union this year was similarly attractive until a bidding war with Williams eroded the upside. If he pulls it off, victory will be sweet indeed.

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