WASHINGTON (dpa-AFX) - Kinder Morgan, Inc. (KMI) Sunday announced a definitive agreement to acquire all of the outstanding shares of El Paso Corporation (EP) for about $38 billion in cash or stock, and warrants for Kinder Morgan shares. The transaction includes the assumption of outstanding debt at El Paso Corp and at El Paso Pipeline Partners, L.P. (EPB). Both boards have approved the deal, which is expected to close in the second quarter of 2012.
The consideration to be received by El Paso shareholders would be $26.87 per El Paso share based on Kinder Morgan's closing price as of October 14, 2011. The value represents a 37 percent premium over the closing price of El Paso shares on Friday and a 47 premium to the 20-day average closing price.
The $26.87 consideration is made of $14.65 in cash, 0.4187 KMI shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share). The warrants will have an exercise price of $40 and a five-year term.
El Paso shareholders would have three options, all cash, all stock, or cash and stock. They could elect to receive either $25.91 in cash, 0.9635 shares of KMI common stock, or $14.65 in cash plus 0.4187 shares of KMI common stock.
All elections would be subject to proration and in all cases EP shareholders would receive 0.640 KMI warrants per share of EP common stock. The receipt of shares and warrants is intended to be tax free for U.S. federal income tax purposes.
Upon closing, KMI shareholders are expected to own approximately 68 percent of the combined company and EP shareholders are expected to own the remaining 32 percent.
El Paso's 43,000-mile interstate pipeline system and Kinder Morgan's more than 37,000 miles of pipelines make up 80,000 miles of pipelines for the combined entity.
Kinder Morgan said the combination, including the associated master limited partnerships, Kinder Morgan Energy Partners, L.P. (KMP) and El Paso Pipeline Partners, would create the largest natural gas pipeline network in the United States, and the fourth largest energy company in North America with an enterprise value of approximately $94 billion.
The pipeline systems of the two Houston, Texas-based companies are complementary as they serve different supply sources and markets in the United States.
The transaction is expected to be immediately accretive to dividends per share at KMI, distributions per unit at KMP, dividends per share at Kinder Morgan Management (KMR) and distributions per unit at EPB. Cost savings of about $350 million per year, or about 5 percent of the combined system's EBITDA, are expected to boost the dividends.
Following the closing of the transaction, EP will become a subsidiary of KMI.
Doug Foshee, El Paso chairman, president and chief executive officer, said company shareholders would derive greater value than from its earlier planned spin-off of its exploration and production business.
However, KMI also intends to sell the exploration and production assets of EP. EP's net operating loss carryforwards will offset taxes associated with the sale and the resulting cash raised would substantially reduce the debt borrowed to fund the cash portion of the transaction.
All of EP's natural gas pipeline assets would be sold to KMP and EPB over the next few years. By end-2015, KMI expects its assets to consist almost exclusively of its general partner interests in KMP and EPB, and the ownership of KMP units, KMR shares and EPB units.
The company projects a dividend of about $1.45 in 2012, if the transaction were to close at the beginning of 2012, up from its current annual rate of $1.20 per share. KMI now expects its dividend per share to grow at an average annual rate of around 12.5 percent through 2015. The earlier growth projection was 10 percent. The company's dividend for 2011 has been budgeted at $1.16 per share.
The combined company's pipelines are connected to the Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville and Barnett shale plays, and would be the only oilsands pipeline serving the West Coast.
Kinder Morgan Chairman and CEO Richard Kinder, said,' This once in a lifetime transaction is a win-win opportunity for both companies.'
Once the transaction is completed, Kinder will remain chairman and CEO of the combined entity. The parent company will be named Kinder Morgan, Inc. and its corporate headquarters will remain in Houston, Texas. Two members of EP's board of directors will join the KMI board of directors. The transaction will require the approval of both KMI and EP shareholders who will vote at special meetings expected to be held by January 2012.
EP has agreed not to solicit competing transactions and to pay a termination fee of $650 million to KMI under certain circumstances.
EP closed Friday's regular trading at $19.59 and traded in the past 52 weeks in a range of $12.51 - $21.54. KMI closed Friday's regular trading at $26.89, has traded in a range of $23.51 - $32.14 over the past year.
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