Kinder Morgan And El Paso May Need To Cut Pipeline Networks To Save Massive Energy Merger

In a transaction valued at $21.1 billion – one of the largest energy deals in history – Kinder Morgan, Inc. has announced a deal to purchase the El Paso Corporation.

The two corporations are large “midstream energy” companies that process and transport oil and gas.  If the deal is approved by shareholders and the FTC, Kinder Morgan will be the largest midstream energy company in North America, controlling some 67,000 miles of pipelines linking every major production field to market.

The FTC is expected to examine whether the combined firm will exert too much control nationally, with particular attention to certain local markets where the firms have overlapping networks.  There is substantial overlap of networks in the center of the Untied States, between the Rocky Mountains and the Midwest.

Kinder Morgan has stated it is willing to sell assets to win approval of the deal.  Some concern about decreased competition may be eased because pipeline rates are regulated by the Federal Energy Regulatory Commission, which must also approve the closure of any pipelines where no alternate supply routes exist.

It is not hard to find precedent for divestiture in the sector.  In fact, the FTC intervened in a previous El Paso merger.  In 2001, El Paso and its merger partner were required to divest 11 gas pipelines stretching more than 2,500 miles before the deal was allowed to proceed.

The Kinder Morgan transaction – which contains a $650 million breakup fee – is expected to close next spring.  The deal has already triggered a lawsuit by the Louisiana Municipal Police Employees Retirement System against Goldman Sachs.  The fund claims that Goldman Sachs – which owns about 20 percent of Kinder Morgan – had a conflict of interest when it advised El Paso to sell to Kinder Morgan Inc.  The lawsuit alleges Goldman advised El Paso to sell at a lower price to earn more fees than if El Paso had gone through with a previously announced spinoff.