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The Globe and Mail

Don't bet against Kinder's lavish pipeline bid

Kinder Morgan pipeline being installed near Windy Point, Jasper National Park, in 2007

Kinder Morgan Canada

A new energy titan may soon be born. If regulators don't object to pipeline operator Kinder Morgan's takeover of rival El Paso, the combined group will have an enterprise value of $94-billion (U.S.), making it among the biggest energy firms in the United States. Kinder is paying more than is justified by the promised cost savings for El Paso . But Kinder's chief has done investors proud in the past and is not to be underestimated.

Richard Kinder, the eponymous chief executive, is aiming to pull off a deal of impressive audacity. With 80,000 miles of pipelines, his new firm would leap over the current pipeline top dog, Enterprise Products Partners. This would also be the largest energy deal in over a year – a fact that will delight the firms' bankers Goldman Sachs, Evercore Partners, Barclays Capital and Morgan Stanley. In terms of market capitalization, the newly enlarged Kinder would still be only about half the size of Occidental Petroleum, the fourth largest energy group, though its enterprise value puts it shoulder to shoulder. Meanwhile, Kinder and El Paso look like a good fit, with complementary pipeline networks.

Such ambitions don't come cheap. The firms are expecting $350-million in synergies. Even allowing for the ultra-low tax rates pipeline firms get away with paying in the United States, this warrants paying a premium of no more than $4.50 per share for El Paso. Yet Kinder is stumping up over $7 – making the deal a value-destroyer.

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Still, Mr. Kinder has been one of the oil patch's canniest allocators of capital. Investors who put $100 with Kinder in 1996, after he jumped ship from Enron, would now be sitting on $2,788. That far exceeds the $900 total return on the Alerian index of pipeline firms, and puts the $215 offered by the S&P 500 index to shame.

And Mr. Kinder held on to about 31 per cent of the stock after taking his firm private and then returning to the market this year, giving him a powerful incentive to make the deal stack up. With cost savings relatively small, Kinder must be assuming a brighter outlook for the growth in U.S. gas demand than other investors. If he's wrong, he'll destroy his own and his shareholders' wealth. Given his track record, that seems an unlikely outcome.

Christopher Swann

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