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Monday, August 28, 2006

Kinder Morgan: A Strong Wind Cannot Blow All Day

Stocks: (KMI)(KMP)(KMR)(GS)(MER)(JPM)

The Chinese philospher, Lao Tzu made the observation that "a strong wind cannot blow all day".
Kinder Morgan today announced that it would go private at a sharp premium to its stock price. At a purchase price of $107.50, the buy-out represents a 27% premium over Friday's close pricing the deal at $15 billion. The buyers will also assumer $7 billion in debt. Goldman Sachs, which seems to have a stake in most private equity deals, AIG, Carlyle and Riverstone will put up most of the money. The company will take on some debt, provided primarily by banks including Deutsche Bank and Wachovia.

Morningstar recently remarked that future growth in the company should be "tempered". Earnings in the last quarter were a bit disappointing. But, the company is one of the biggest operators of oil and natural gas pipelines, a business that grows at the need for oil, and the price, ramps up. The research firms expects operating earnings plus gains on equity investments to be $1.6 billion in 2006. Although this numer is impressive, does it justify a $22 billion buy-out?

Over this weekend, Barron's made the point that shares in companies like Goldman Sachs, Merrill Lynch, and JPMorganChase may have reached their peaks. M&A activity and private equity transactions are bound to slow as the economy cools off, interest rates rise, and the stock market moves down.

One of these big equity deals will burn its financial supporters. In every cycle, there is a signature deal which signals the beginning of the end and economic historians look back on ther period. If Barron's is right, Kinder Morgan could be that deal.

Douglas A. McIntyre can be reached at

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