Kinder Morgan to acquire El Paso in $38B transaction
With $94B enterprise value, combined company to become North America's fourth largest
In a move that will create the largest owner and operator of natural gas pipelines and storage assets in North America, with 80,000 miles of pipelines spanning nearly all of the major unconventional plays across the US, Kinder Morgan Inc. announced plans Oct. 16 to buy El Paso Corp. for roughly $38 billion in cash, stock, and assumed debt.
The offer is valued at $26.87 per El Paso share, a 37% premium over Friday's close, consisting of $14.65 in cash, 0.4187 shares of Kinder Morgan (valued at $11.26 per El Paso share), and 0.64 Kinder Morgan warrants (valued at $0.96 per El Paso share), all based on Kinder Morgan's closing price of $26.89 on October 14.
In a note to investors October 17, Global Hunter Securities (GHS) analysts calculated, on an EV/EBITDA basis, the transaction value for El Paso is 11.5x and 11.2x consensus 2011E and 2012E EBITDA, compared to its previous close at 9.8x and 9.6x consensus 2011E and 2012E EBITDA, respectively.
Upon closing, expected in 2Q12, Kinder Morgan shareholders would own approximately 68% of the Houston-based combined company, with El Paso shareholders owning the remaining 32%.
"This once in a lifetime transaction is a win-win opportunity for both companies," said Kinder Morgan chairman and CEO Richard D. Kinder. "We believe that natural gas is going to play an increasingly integral role in North America," he continued.
Doug Foshee, chairman, president and CEO of El Paso said the company board and management believe the agreement "will provide an even greater value" for shareholders than through the previously planned spin-off of its E&P business.
Once complete, Kinder Morgan plans to sell El Paso's E&P assets, utilizing El Paso's net operating loss carryforwards to offset taxes associated with the sale and using the sale proceeds to reduce the debt incurred to fund the cash portion of the deal. It is unclear if Kinder Morgan plans to include its upstream assets in any potential sale.
El Paso's E&P assets held proved reserves of 3.17 Tcfe (78% natural gas) at year-end 2010 and produced 823 MMcfed in 2Q11, noted GHS analysts.
"This deal continues the trend of large-scale consolidation of natural gas assets. El Paso's upstream business will provide a juicy target—with an operating organization in addition to assets—for large acquirers currently stalking the US for prey, in addition to providing additional valuation insight to many plays including the Wolfcamp, Eagle Ford, Haynesville, and Altamont, where the company has an estimated 3,260 drilling locations across these four plays," noted the analysts.
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