Tuesday, October 18, 2011

US regulators to scrutinize Kinder-El Paso deal

Kinder Morgan Inc's planned purchase of El Paso Corp to create the largest U.S. natural gas pipeline network will receive a close look from U.S. regulators, who may require substantial pipeline divestitures.

The $21 billion merger will almost certainly receive heavy scrutiny from the Federal Trade Commission, which traditionally reviews large natural gas pipeline mergers, according to antitrust experts.

The companies' pipelines in the Rocky Mountains will be a key focus for the FTC, experts said.

"When you look at overlap today, there is some in the Rocky Mountains," said Carl Kirst, analyst at BMO capital markets, predicting that the FTC will approve the deal. "Maybe they have to sell one pipeline."

The combined company will be a pipeline juggernaut with the ability to deliver massive amounts of crude oil and natural gas over 80,000 miles of pipe stretching from coast to coast, and could demand higher transport fees from oil and gas producers.

Kinder Morgan's chief executive, Rich Kinder, said on Monday he believes the merger will be approved, but he acknowledged some areas where the companies' pipeline networks overlap.

"We certainly anticipate we will obviously have to comply with the regulator, in this case, the (U.S. Federal Trade Commission), and we'll work with them to satisfy whatever their concerns are; but we don't see that as a major obstacle and we do expect to close, we're thinking, in the second quarter of next year," Kinder told investors on a conference call.

Kinder said his company would work with the FTC to address any issues raised about overlapping pipeline networks.interstate natural gas pipelines owned by Kinder Morgan and El Paso, but will not review the merger, an agency spokeswoman said.

While the FTC will closely examine the merger, it is likely that the deal will ultimately be allowed to move forward, said Bruce McDonald, a former Justice Department deputy assistant attorney general now at Jones Day law firm.

"Some divestitures may be required but it seems unlikely that the entire deal will be blocked," he said.

Billionaire investor Carl Icahn, the biggest individual holder of El Paso's stock, said he expects the FTC to approve the deal. "I think the deal goes through," Icahn told the CNBC television network.

If the FTC determines that the merger would harm competition in these overlapping areas, the companies could be forced to sell some of these assets.

"If they wind up being in a dominant position because of a merger in those areas, the solution would be to divest one of their pipelines," said Andrew Gavil, a professor at the Howard University School of Law.

The companies seem to be hinting that there could be some competitive issues by acknowledging publicly that there are areas of overlap, Gavil said.

"They understand there are antitrust issues upfront, otherwise you don't publicly negotiate against yourself," he said. "What they're signaling is they're willing to negotiate a deal that would address any antitrust concerns."


As part of the planned deal, Kinder plans to sell El Paso's exploration and production assets, valued by analysts at roughly $8 billion to $9 billion. That deal is expected to close in the second quarter and proceeds will be applied to acquisition debt, Kinder told investors.

El Paso's exploration and production business, which includes assets in the hot Eagle Ford Shale in South Texas, is valued at $9.2 billion, according to analysts at Houston investment energy bank Tudor Pickering Holt & Co.

The deal derails El Paso's plan, announced in May, to split into two publicly traded companies, which would have separated its exploration and production business from its pipeline operations.

Kinder Morgan said it plans to sell the exploration and production assets as soon as it is practical -- possibly at the same time as the deal's closing.

"We would anticipate that we will sell it for cash to third parties and our preference would obviously be to sell it as a whole," Kinder said on the conference call. Kinder acknowledged that the assets may command a better price by selling them off in pieces.

The company's assets include positions in the Eagle Ford, Wolfcamp and Haynesville shales, as well as assets in the Gulf of Mexico and offshore Brazil.

"The combination Haynesville, Eagle Ford, and oil PROPERTIES [] reminded us of another E&P company that is no more -- PetroHawk," Tudor Pickering analyst Brad Olsen said in a research note, referring to the oil and gas company bought by BHP Billiton for more than $12 billion in August.

Investment bankers said that a cash deal of that size would rule out all but the largest independent oil and gas companies -- like Apache Corp, Anadarko or Devon -- and the integrated oil and gas companies.

Shares of El Paso closed up nearly 25 percent at $24.45 on Monday, and shares of Kinder Morgan closed up nearly 5 percent at $28.19, after climbing above $29 earlier in the day. ' Reuters


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