Bloomberg News

Kinder Morgan’s El Paso Buyout Allowed to Proceed to Vote

March 01, 2012

Kinder Morgan (KMI) Inc. may proceed to a shareholder vote on a $21.1 billion takeover of El Paso (EP) Corp. after a judge rejected claims that Goldman Sachs Group (GS) Inc.’s conflict of interest warranted blocking the deal.

Delaware Chancery Court Judge Leo Strine rejected calls by some El Paso shareholders to block pipeline operator Kinder Morgan’s $25.91-a-share offer. El Paso didn’t negotiate a high enough price and Goldman Sachs, which owns 19 percent of Kinder Morgan, wrongfully served as adviser to El Paso on the deal and improperly influenced negotiations, they argued in court papers.

“I reluctantly deny the plaintiffs’ motion for a preliminary injunction, concluding that the El Paso stockholders should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms,” Strine ruled yesterday.

The role of New York-based Goldman Sachs on both sides of the deal was the focal point of the Wilmington case. Pension funds from Louisiana, Florida and New York that invested in El Paso argued Goldman Sachs, the fifth-largest U.S. bank by assets, has long-standing ties to Kinder Morgan and helped Richard Kinder, the firm’s chief executive officer, take the pipeline operator private in 2006.

‘Gratified’

El Paso shareholders are scheduled to vote on the offer March 6. El Paso rose 30 cents to $28.10 in New York Stock Exchange trading. Kinder Morgan rose 68 cents to $35.92. Both companies are based in Houston.

“We’re gratified that the judge denied the injunction and that we can proceed with the vote of the shareholders,” Larry Pierce, a spokesman for Kinder Morgan, said in an e-mail yesterday.

El Paso officials are looking “forward to the close of the transaction with Kinder Morgan,” company spokesman Richard Wheatley said in a phone interview.

“We are pleased that shareholders will get to vote on the merger,” David Wells, a spokesman for New York-based Goldman Sachs, said in an e-mail. “We respect the judge’s opinion but want to be clear that we stood by our client through this process, encouraging them to get independent views from another adviser. We were also transparent with El Paso about our relationship with Kinder Morgan and the related issues.”

Goldman Sachs has designees in two of Kinder Morgan’s board seats because of its ownership stake in the pipeline operator, the funds argued. Last year, the bank reaped millions of dollars by leading Kinder Morgan’s initial public offering, they said.

Approached Rival

Goldman Sachs has also advised El Paso over the years, the investors said in court papers. When Kinder approached its rival about a takeover last year, El Paso called in Goldman Sachs to help. It was already advising the company on potential spinoffs.

The pension funds contended in their suit that Goldman Sachs had a financial incentive to advise El Paso’s managers to accept a lower price than they might have negotiated. Kinder’s cash-and-stock bid amounts to a 37 percent premium to El Paso shareholders, according to the company.

“Goldman’s staggering conflict of interest was obvious from the outset: With a stake in KMI worth over $4 billion, every dollar shaved off the buyout price represented $150 million of savings for Goldman,” the funds argued.

The shareholders also said Douglas Foshee, El Paso’s CEO, has conflicting interests in the Kinder Morgan deal. They said Foshee approached Kinder about pursuing a management-led bid for El Paso’s energy-exploration unit while negotiating the potential purchase of the whole company.

Conflicts

Foshee never informed El Paso’s board or shareholders that he and a group of executives were considering buying the unit, the investors argued in court papers.

El Paso and Goldman Sachs denied that the takeover was flawed by conflicts of interest or that the buyout shortchanged shareholders.

Goldman Sachs said that the bank and El Paso took “reasonable measures” to address potential conflicts and Goldman Sachs’ advisers didn’t compromise El Paso directors’ consideration of the takeover proposal.

Goldman Sachs executives serving as Kinder Morgan directors recused themselves from discussions of the deal and fully disclosed their ownership stake to El Paso officials, Goldman Sachs said.

El Paso also hired New York-based investment bank Morgan Stanley to serve as an additional adviser on the deal to double- check Goldman Sachs’s work, Goldman Sachs and El Paso said.

“Every piece of Goldman Sachs’s advice is painted in the most dastardly terms, allegedly motivated by rapacious and crude objectives,” Goldman Sachs said in court filings.

In the ruling, Strine acknowledged that Goldman officials attempted to address concerns about its conflict interests in the El Paso buyout.

“Although it is true that measures were taken to cabin Goldman’s conflict,” Strine found the investment bank’s efforts “were not effective.”

Strine also noted that Steve Daniel, the Goldman Sachs’s lead investment banker on the deal, failed to disclose that he personally owned “ approximately $340,000 in Kinder Morgan stock, a troubling failure that tends to undercut the credibility of his testimony and of the strategic advice he gave.”

The judge also pointed to El Paso lawyers’ denials that Foshee made a serious attempt to buy the energy exploration unit. Strine noted that the attorneys characterized Foshee’s conversation with Kinder about acquiring the unit as “frivolous.”

“Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinder over canapés and forgotten about the next day,” Strine wrote. “It could be.”

‘Smart Man’

“Or it could be that Foshee is a very smart man, and very financially savvy,” the judge added. “He did not tell anyone but his management confreres that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted,” the judge said.

Foshee’s and Daniel’s failures to disclose their conflicts raised questions about the deal, Strine noted. “This kind of furtive behavior engenders legitimate concern and distrust,” the judge wrote.

Still, El Paso shareholders should have the right to decide whether they want to go forward with the offer, Strine said.

“Given that the El Paso stockholders are well positioned to turn down the Kinder Morgan price if they do not like it, I am not persuaded that I should deprive them of the chance to make that decision for themselves,” the judge concluded.

Disgruntled El Paso shareholders can proceed with damage claims in the case even if a majority of investors back the deal, Strine said.

The case is In re El Paso Corp. Shareholder Litigation, Consolidated 6949-CS, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net; Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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