Kinder Morgan CEO: More Acquisitions to Come

The biggest U.S. pipeline company, Kinder Morgan Inc, will be better able to acquire rivals after it consolidates as a single company and buys out investors in its publicly traded units for $44 billion, its CEO said on Monday.

The North America midstream company already operates or has stakes in 80,000 miles of pipelines and there is growing demand for new infrastructure to handle surging output of oil and gas from the U.S. shale boom.

Kinder Morgan's shares closed 9 percent higher as investors embraced the deal, although it is expected to create significant tax bills for investors in two of its units: Kinder Morgan Energy Partners LP and El Paso Pipeline Partners LP , which both rose around 20 percent.

"We have such a broad platform, virtually anything in the midstream area would fit us," Chairman and Chief Executive Officer Rich Kinder told investors on a conference call.

He did not name potential takeover targets, but said the company would not stray from its core business. For instance, he said it would not start buying "truck lines and railroads," which increasingly have been used to move crude oil, but have drawn criticism after fiery accidents.

Kinder Morgan said on Sunday it would put all its units under one roof. Investors had grown concerned the tax-advantaged Master Limited Partnership (MLP) structure that the Houston-based company popularized was hurting its growth and was too complicated.

Under the terms of the deal, it will consolidate its MLPs, Kinder Morgan Energy Partners and El Paso Pipeline Partners, with Kinder Morgan Management LLC and organize into a single C-corporation.

The proposed deal makes sense for Kinder Morgan because the company had grown so large and was paying out so much of its cash to its general partners that it was hindered in making acquisitions by a higher cost of capital, he said.

Those payouts to general partners amounted to about 40 percent of profits, a source familiar with the deal said.

"This is no way a swipe at MLPs in general," Kinder told investors.

MLP PENALTY, TAXES RISE

Investors had penalized Kinder Morgan for having two MLPs that left it undervalued overall, while MLPs have come under increased scrutiny.

The Internal Revenue Service halted approvals this year for new MLPs that depart from the traditional pipeline model. Some investors have said the weak corporate governance standards of MLPs expose minority investors to more risks, while other investors have warned that any rise in U.S. interest rates could make MLPs less attractive.

MLPs pay no taxes if they distribute the bulk of their profits to investors. But the structures can become unwieldy. The biggest MLPs face pressure to increase distributions for yield-hungry investors, even as general partners are often entitled to bigger payouts if certain performance thresholds are met.

Kinder Chief Financial Officer Kimberly Dang said the transaction will be tax-free for holders of Kinder Morgan Management shares, which is a C-corporation, while investors in the Kinder MLPs will be taxed on capital gains and ordinary income.

Investors said the tax setback would be temporary.

"This is a taxable transaction, so that may be a short term hit for people," said Quinn Kiley, of Advisory Research Inc, which manages over $6 billion in MLP companies. "The reality is when you have a big tax payment, it's because you've made a lot of money. It's a good problem to have."

Greg Reid of asset management firm Salient, which owns Kinder Morgan units, said the company would be able to tap a wider pool of investors as many cannot buy MLPs.

"(This) opens up the universe to a lot more institutional buyers," Reid said.

Some other MLPs with lagging growth could follow Kinder's lead and organize as a single company, but a banker said Kinder Morgan's case was unique and a mass departure from the MLP structure was unlikely.

INDEXES RISE, TAKEOVER TARGETS

The shares of other large-cap MLPs were up across the board, in part because Kinder Morgan's consolidation means its units will exit two key MLP indexes. That will create space for other MLPs, some of which could be potential acquisition targets.

In morning trading Monday, the benchmark Alerian MLP index was up 4.3 percent, as all but one of the index's 50 constituents were higher. Alerian traditionally rebalances the index just after needed merger votes are passed, according to firm documents.

The index's constituents have an average size of $8.5 billion. The shares of the next-largest were rallying on Monday. Plains All-American Pipeline LP gained 2.2 percent and Energy Transfer Partners LP gained 2.6 percent. Neither company was available to comment.

"The universe is not that big so $50 billion leaving it, that money is going to want to find a new home in other MLPs," said Tsachy Mishal, founder and chief investment officer at TAM Capital Management in New York, who owns units of Energy Transfer Partners, which has a 5.7 percent weight in the Alerian index. (Reporting by Anna Driver in Houston, David Gaffen and Mike Stone in New York.

By Anna Driver