Houston billionaire Richard Kinder is consolidating his pipeline empire to strengthen it for growth as the US shale drilling boom opens up $1.5 trillion in potential purchases and expansion projects.
Kinder Morgan plans to acquire all of Kinder Morgan Energy Partners LP, Kinder Morgan Management LLC and El Paso Pipeline Partners LP in a series of transactions valued at about $44 billion.
The move by Kinder, who controls the entities through his 24 per cent stake in the parent company, runs counter to the industry trend of spinning off pipelines and oil terminals into tax-advantaged partnerships that funnel cash to investors. By simplifying his empire’s corporate structure, Kinder will lower borrowing costs and unify the company under a single stock that he can use as currency to buy competitors. The consolidation will make it easier and more profitable for Kinder “to pursue expansion and acquisitions in a target- rich environment,” the company said in a slide presentation published on its website yesterday.
Investors have been putting pressure on Kinder, 69, to consolidate, cut costs and increase profits.
The surprise in the restructuring is that Kinder decided to consolidate the companies under the corporate parent instead of making it one, giant partnership that would continue to benefit from the tax structure of so-called master limited partnerships. In its note to investors, Tudor Pickering had proposed the partnership buy its parent, Kinder Morganinstead of vice versa. Although the proposed combination will eliminate the partnership’s tax-free status, the arrangement will confer other tax benefits on the parent company, reducing income tax liabilities by about $20 billion over 14 years, according to the website presentation.
The merger of the Kinder siblings, expected to be finished by the end of this year, will create the largest energy infrastructure company in North America with an 80,000-mile network of pipes that together would be long enough to circle the Earth three times.
Kinder, who co-founded the company in the 1990s with cast- off assets from Enron helped pioneer the MLP structure, which doesn't pay federal income tax. MLPs trade in units rather than shares. Holders of Kinder Morgan Partners and El Paso will have the option of taking cash or KMI shares in return for their units, according to the statement. The transactions are comprised of $40 billion in parent company equity, $4 billion in cash and $27 billion in assumed debt, according to the presentation.
Kinder, who takes a $1-a-year salary and earns no annual bonus from any of the four companies, will see his annual pay from dividends increase by more than $100 million thanks to the deal, according to data compiled by Bloomberg. Beginning in 2015, Kinder will earn almost $500 million a year from the $2-a-share dividend he’s pledged to investors as part of the deal. That amount is based on the number of shares he will have in the combined company after the transaction, assuming he takes cash payments in lieu of additional Kinder Morgan Inc. shares. That compares with the $380 million he received last year from payouts by all four entities.
Kinder, whose net worth is estimated at $10.5 billion, according to the Bloomberg Billionaires Index, stands to make about $8 million from the deal based on the number of shares he holds in each company, according to data compiled by Bloomberg.