Kinder Morgan eyes $22b MBO

Co-founder Richard Kinder’s management-led buyout of the pipeline operator would be the second largest private equity deal of all time. GS Capital, AIG, Carlyle and Riverstone are providing equity to the proposed deal.

A consortium of private equity firms and senior management of Houston-based Kinder Morgan have sent a letter to the company’s board of directors proposing to take it private for about $13.4 billion, with an additional $8 billion of assumed debt.

Richard Kinder is leading the effort to take Kinder Morgan private.

Chairman and chief executive Richard Kinder’s letter to the company’s board of directors offered to pay $100 per share to take the company private, a premium of 18.5 percent over Friday’s closing price of $18.41.

The investor group also includes co-founder Bill Morgan, board members Fayez Sarofim and Mike Morgan, Goldman Sachs Capital Partners, AIG Global Asset Management Holdings Corp., The Carlyle Group and Carlyle energy affiliate Riverstone Holdings.

The investment from the executives and board members would total roughly $2.8 billion, with the outside investors contributing $4.5 billion in equity. The rest of the amount would be financed with debt.

Kinder Morgan owns an interest in or operates about 43,000 miles of pipeline transporting natural gas, crude oil and petroleum products. The company has more than 150 storage and transport terminals for gasoline and coal and provides natural gas distribution service to more than 1.1 million customers. A series of acquisitions in the US and Canada since 1999 has pushed the company’s shares up 155 percent. In 2005 the company had a net income of $554 million, an increase of about $30 million from the year before.

On May 22 Kinder Morgan sold its Terasen water and utility services business to a group led by CAI Capital Management Company, a Toronto-based private equity firm.

Goldman Sachs Capital Partners is a unit of Goldman Sachs Group, which also acted as an advisor to the deal. This potential conflict of interest could draw attention at a time when many private equity firms are complaining about investment banks operating in this dual role. While other investment banks have altered their in-house private equity activity in response to complaints from big private equity firms, Goldman has continued its heavy involvement as a principal investor, closing an $8.5 billion private equity fund in April 2005.

The Kinder Morgan buyout, pending shareholder approval, is expected to close within three to six months. If it does, it would be the second largest private equity deal of all time, behind only Kohlberg Kravis Roberts’ $31.5 billion acquisition of RJR Nabisco in 1989.