Management Buyout Case Study: Kinder Morgan
Kinder Morgan - MBO
Richard Kinder and Bill Morgan purchased a master limited partnership pipeline company from Enron for $40 million in 1997, founding Kinder Morgan, Inc. (KMI) 1. The primary benefit of an MLP comes in the form of tax savings. While shareholders in a corporation face double taxation, owners of a partnership are taxed only once (when receiving distributions). Corporate income tax does not exist in the partnership. When cash distributions to MLP owners exceed partnership the difference is counted as a return of capital to the limited partner and taxed at the capital gains rate when the unit holder sells. This creates a pass-through entity that is sustainable as long as 90% of the cash flow is distributed and certain asset ownership is followed.
KMI began amassing energy assets that would generate stable, long-term cash flows. Incentive to allocate capital2 and a lower cost of capital due to an absence of taxes drove KMI to grow the business. The profit-sharing structure set up between the general partner KMI and the limited partner Kinder Morgan Energy Partners (KMP), was done on a sliding scale. The incentive here was for KMI to raise more money as it would receive a greater share of each dollar of cash flow as the limited partners ' cash distributions rose. KMI had been maxing out its share of the profits for over a decade (50%).
Nearly a decade had passed since KMI’s conception and it had become a giant. The once $40 million firm had accumulated over $35 billion in assets and recently finished commitments for a new natural gas pipeline in the Rocky Mountains. Despite the company’s prosperity, Wall Street was not taking notice. The share price slipped to $84 a share, although analysts priced it in the $100-120 range. For these reasons, a meeting in early 2006 sparked ideas of taking the company private.
Management was obviously flustered with analysts’ evaluation of Kinder Morgan, as well as the
Richard Kinder and Bill Morgan purchased a master limited partnership pipeline company from Enron for $40 million in 1997, founding Kinder Morgan, Inc. (KMI) 1. The primary benefit of an MLP comes in the form of tax savings. While shareholders in a corporation face double taxation, owners of a partnership are taxed only once (when receiving distributions). Corporate income tax does not exist in the partnership. When cash distributions to MLP owners exceed partnership the difference is counted as a return of capital to the limited partner and taxed at the capital gains rate when the unit holder sells. This creates a pass-through entity that is sustainable as long as 90% of the cash flow is distributed and certain asset ownership is followed.
KMI began amassing energy assets that would generate stable, long-term cash flows. Incentive to allocate capital2 and a lower cost of capital due to an absence of taxes drove KMI to grow the business. The profit-sharing structure set up between the general partner KMI and the limited partner Kinder Morgan Energy Partners (KMP), was done on a sliding scale. The incentive here was for KMI to raise more money as it would receive a greater share of each dollar of cash flow as the limited partners ' cash distributions rose. KMI had been maxing out its share of the profits for over a decade (50%).
Nearly a decade had passed since KMI’s conception and it had become a giant. The once $40 million firm had accumulated over $35 billion in assets and recently finished commitments for a new natural gas pipeline in the Rocky Mountains. Despite the company’s prosperity, Wall Street was not taking notice. The share price slipped to $84 a share, although analysts priced it in the $100-120 range. For these reasons, a meeting in early 2006 sparked ideas of taking the company private.
Management was obviously flustered with analysts’ evaluation of Kinder Morgan, as well as the