Rich Kinder’s decision to get out of Enron waaay back in 1996 and turn a bunch of pipelines and other hard assets into a multibillion dollar business makes him a pretty sharp guy. His decision to take part of the business private in 2007 is proving to be even smarter for him and his investors.
According to a report from CreditSights, the leveraged buyout of the former Kinder Morgan Inc. (now called Knight Inc.) is shaping up to 40 percent return on equity for the firms that backed the deal.
In a nutshell: The $4.5 billion in equity from Goldman Sachs, GS Capital Partners, AIG Global Investment Group, The Carlyle Group and Riverstone Holdings, plus the $2.8 billion from Kinder, company co-founder Bill Morgan, board members Fayez Sarofim and Mike Morgan, and other members of senior management (plus some other investor equity) are today worth about $10.9 billion, according to CreditSights. Not too bad for a lot of paper shuffling.
Even more amazing is how quickly Knight paid off debt since the transaction – from $7.8 billion pre-deal to $2.9 billion now.
Of course realizing the profit would require an exit strategy, i.e. such as taking the company public or selling it off. But CreditSights notes the equity markets aren’t yet strong enough to absorb an IPO the size of Knight, and that the private equity investors might have a hard time finding buyers for thier shares, too. Given the size of Knight’s pipeline businesses a merger with another company might lead to anti-trust issues.
So for now the investors may just have to “settle” for dividends. The firm made its first such payment, $50 million, in February:
“The most logical opiton is the LBO group does nothing and collects additional dividend payments. The quetion is what the dividend run-rate will ultimatley be. We would like to think that the great treatment KMI has showed the legacy bondholders will continue but it is very tough to invest on that premise and we would not recommend investors do so.”