Kinder Morgan Inc. (NYSE: KMI) wants to be one big happy family, bringing its companies into the fold in a $71 billion merger.

KMI plans to combine Kinder Morgan Energy Partners LP (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR) and El Paso Pipeline Partners LP.

Combined, the company would own enough miles of pipeline to crisscross the U.S. about 25 times.

The deal would be one of the largest in the U.S. since the $41 billion merger of ExxonMobil Corp. (NYSE: XOM) and XTO Energy in 2010.

Management forecasts a 2015 KMI dividend of $2 per share, 16% above its 2014 guidance of $1.72 per share, said Bill Herbert, managing director and co-head of securities for Simmons & Co. International.

The transaction is expected to support 10% average annual growth in the KMI dividend during the period of 2015 to 2020. The purchase would include assumption of $27 billion in debt for a net purchase of $44 billion.

“Plenty of significant questions are raised by this transaction, aside from the quest for growth, including expectations for interest rates and the ability to continue capturing generous valuation arbitration via the MLP structure,” Herbert said.

Kinder Morgan would become a giant company, the third-largest energy company in North America with a combined pro forma enterprise value of about $140 billion. The company has $17 billion of currently identified organic growth projects lined up.

“All shareholders and unitholders of the Kinder Morgan family of companies will benefit as a result of this combination,” said chairman and CEO Richard D. Kinder. “Everyone will hold a single, publicly traded security – KMI – which will have a projected dividend of $2 in 2015, a 16% increase over the anticipated 2014 dividend of $1.72.”

Kinder would also be the largest natural gas network in North America, owning interest in or operating 68,000 miles of natural gas pipeline.

It would also serve every significant shale natural gas resource play, including the Eagle Ford, Marcellus, Utica, Uinta, Haynesville, Fayetteville and Barnett.

Megadeal

The deal dwarfs the largest upstream deal since 2010. In 2013, Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) completed its acquisition of Plains Exploration & Production Co. (NYSE: PXP) and McMoRan Exploration Co. for $20.35 billion.

“We expect to grow the dividend by approximately 10% each year from 2015 through 2020, with excess coverage anticipated to be greater than $2 billion over that same period,” Kinder said.

Under the terms of the deal:

  • KMP unitholders would receive 2.1931 KMI shares and $10.77 in cash for each KMP unit, a 12% premium of $89.98 per unit based on the Aug. 8 closing prices.
  • KMR shareholders would receive 2.4849 KMI shares for each share of KMR, a 16.5% premium based on Aug. 8 closing prices.
  • EPB unitholders would receive .9451 KMI shares and $4.65 in cash for each EPB unit, a price of $38.79 per unit and a 15.4% premium.
  • Both KMP and EPB unitholders will be able to elect cash or KMI stock consideration subject to proration.

“This transaction dramatically simplifies the Kinder Morgan story, by transitioning from four separately traded equity securities today to one security going forward, and by eliminating the incentive distribution rights and structural subordination of debt,” Kinder said. “We believe that KMI will be a valuable acquisition currency and have a significantly lower hurdle for accretive investments in new energy infrastructure.”

The transaction also provides significant tax benefits for KMI shareholders from depreciation deductions associated with the upfront purchase and future capex.

MLP Consolidations

Freeport certainly isn’t the first company to roll up its companies. Several companies are engaging in the same tactics. NGL Energy Partners LP (NYSE:NGL) has offered to buy TransMontaigne GP LLC to control its subsidiary, Transmontaigne Partners (NYSE: TLP). Williams Cos. (NYSE: WMB) is merging its control of its two MLP subsidiaries, Access Midstream Partners LP (NYSE: ACMP) and Williams Partners LP (NYSE: WPZ).

At least three other recent general partner buyout trades highlight the merits of combinations and the possibility for sharp, material upside potential, said Ethan Bellamy, senior analyst for Baird Energy.

“It's an extraordinary and unprecedented time for MLPs in terms of secular growth opportunities, underlying capital formation and flows, coupled with residual legacy pressures from weakened natural gas prices and a restructuring of the natural gas market,” Bellamy said.

Bellamy expects the trend toward consolidation to continue. Kinder’s move will only help it in the market and in operations.

“We see this as an elegant solution to improve Kinder's prospects and as a positive for MLPs on consolidation upside potential,” he said.

The transaction is expected to close in the fourth quarter of 2014 subject to shareholder and regulatory approvals.

Barclays and Citi acted as financial advisers to KMI. Barclays is providing committed financing for the transaction, and Weil Gotshal & Manges and Bracewell & Giuliani acted as legal counsel to KMI. Jefferies acted as financial adviser to KMP and KMR, and Baker Botts acted as legal counsel to KMP and KMR. Tudor, Pickering, Holt & Co. acted as financial adviser to EPB and Vinson & Elkins acted as legal counsel to EPB.

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