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…show more content… Both of these assets (like most of KMI’s assets) were exposed to commodity price risk. However, KMI saw opportunity for long-term gains as they internally projected high commodity prices.
Tied in with projections for commodity pricing is the undervaluation of the company. A major incentive for management in this buyout is clearly this undervaluation. KMI had been valued between $100 and 120 a share, yet was trading at only $84. KMI had experienced five years of increasing revenues and its net income was on an upward trend. KMI was financially healthy and its vast infrastructure would only continue to generate cash flows. It was a perfect buy-low scenario for the investors that knew the firm the best, the managers.
Buy Low, Sell High
There are conflicting desires at work, as management may not be acting in the best interest of its shareholders. To try and dispute agency conflict, Kinder established a special committee to make decisions regarding the privatization proposal. The committee was committed to executing due diligence in finding other alternatives, as well as, negotiating with any buyout group. MBO’s can be stressful on boards as they feel there is no choice. If the board declines, they will be left not only without a deal, but also with displeased management. Moreover, other bidders are less inclined to commit because they do not have management support. The