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Summary

  • Kinder Morgan announced on August 10 that the company will buy all the outstanding common units of its limited partnerships and Kinder Morgan Management.
  • The transaction has enhanced our optimism and we believe the combined entity will be a better investment.
  • We maintain that Kinder Morgan will be a solid long-term investment for both growth and income investors.

Kinder Morgan (NYSE:KMI) recently announced its intention to acquire the common units outstanding of its limited partnerships: Kinder Morgan Energy Partners (NYSE:KMP) and El Paso Pipeline Partners (NYSE:EPB) - the company also announced it intends to buy all the outstanding shares of Kinder Morgan Management (NYSE:KMR), the entity responsible to manage the operations of both the partnerships. The general partner, KMI will be acquiring its master limited partners and will no longer enjoy the tax shielded structure of MLPs. Moreover, KMI will also not receive the lucrative incentive distribution rights [IDRs] as a general partner of KMP and EPB. Further, the combined entity will be the largest energy infrastructure company in North America with an estimated enterprise value of approximately $ 140 billion.

The KMP unit holders will receive 2.1931 of the KMI shares and $10.77 cash for each KMP unit which translates to a unit price of $89.98, and a premium of 12% based on August 8 closing prices. This price represents a premium of 11.4% based on the July 16 closing price used as reference date by the parties during the transaction. Moreover, KMR shareholders will receive 2.4849 of the KMI shares for each share of KMR, which translates into a price of around $89.75 per share and a premium of 16.5% based on August 8 closing prices. This price represents a premium of 16% based on the July 16 closing price used as reference date by the parties during the transaction. Further, the EPB unit holders will receive 0.9451 of the KMI shares and $4.65 cash for each EPB unit, translating into a unit price of around $38.95, representing a premium of 15.4% based on August 8 closing prices and 11.2% based on the July 16 closing price.

This transaction has further enhanced our belief in the company and ensured that the growth will continue for KMI. We reaffirm that KMI is a solid long-term investment. The resulting energy structure will reduce the structural complexity of the Kinder Morgan group with a significant increase in the dividend yield. The company anticipates a projected dividend of around $2 in 2015, which represents an increase of 16% compared to estimated $1.72 per share dividend in 2014. Moreover, KMI expects strong revenue and cash flow growth in the future which is mainly attributed towards the individual asset acreages and strong order backlog of the combined entities.

Source: Update: Kinder Morgan Acquisition; Combined Entity Will Be A Solid Investment