In a development that drips with irony on the heels of last week’s jury verdict in the Lay-Skilling trial, Houston-based Kinder Morgan, Inc. announced that its management team — led by Kinder Morgan CEO and former Enron chief operating officer, Richard D. Kinder — is proposing to take the oil-and-gas pipeline powerhouse private in a $13.5 billion deal that would be the largest management-led, leveraged buyout in American business history.
Any further question that the public company model is looking less attractive to private ownership as a means to building owner wealth in the post-Enron era?
Chalk up a good portion of that development as another cost (among the many others, as Larry Ribstein notes) of demonizing Lay and Skilling, as well as everything having to do with Enron. Remind me again — the purported purpose of these prosecutions was to protect investors in public markets?
At any rate, Kinder and other KM executives are planning on contributing $2.8 billion of their existing shares to the newly private company, and private-equity investors Goldman Sachs Capital Partners, American International Group Inc. and the Carlyle Group would contribute another $4.5 billion.
The new private company would take on a total of $14.5 billion in debt, which means that the transaction has a total value of around $22 billion. Kinder and other KM executives are offering $100 a share for the company, which is about an 18% premium on Friday’s New York Stock Exchange closing price of $84.41. The 52-week high for KM shares is $103.75.
The irony of the deal is that KM is largely the result of a combination of Kinder’s talent and Ken Lay’s choice.
Back in 1996, Lay and the Enron board were attempting to choose between Kinder and Jeff Skilling to replace Lay as chief executive in running Enron’s day-to-day operations.
Lay chose Skilling, so Kinder left and began KM with about $40 million in primarily pipeline assets that he bought from Enron as a part of his severance deal.
Under Skilling, Enron embraced a business model based primarily on what became a huge trading operation, while Kinder built a formidable portfolio of stodgier, but increasingly valuable, oil and gas pipeline assets at KM.
KM has been fabulously successful. Since 1999, KM’s share price has increased over 150% through an aggressive expansion of the company’s business in both the U.S. and Canada and the company currently transports more than two million barrels of gasoline a day through 43,000 miles of pipelines, manages over 80 million tons of coal each year, owns huge terminals for distributing oil and gas and oil-sands assets in Alberta, Canada and stores about 75 million barrels of oil and chemicals.
As a result, Kinder has become one of Houston’s wealthiest business executives — his 18% stake in KM is worth around $2.4 billion based on Friday’s closing KM share price.
Thus, KM’s success provides one of the most interesting “what if’s” of the Enron saga.
What if Lay and the Enron Board had chosen Kinder over Skilling and spun off Enron’s trading operation to Skilling in a similar manner to the way in which Enron provided Kinder with the base assets he used in starting KM?
My sense is that Kinder would have steered Enron to success as a KM-type pipeline company, albeit probably not as successful as KM, which was never hindered by Enron’s less-successful business ventures.
Meanwhile, I believe Skilling would have enjoyed the same type of success in building a spin-off trading company that Kinder has enjoyed in building KM.
Indeed, with the benefit of 20-20 hindsight, Skilling seems like the type of fellow who would have been much more fulfilled in building an Enron spin-off into a trading powerhouse than he was in dealing with many of Enron’s far-flung business operations that he neither created nor thought were particularly important to Enron’s success.
Amidst the current demonization of Lay and Skilling, most folks largely overlook the fact that Lay probably would not have been indicted at all if he had declined the Enron Board’s request that he replace Skilling as Enron CEO when Skilling resigned unexpectedly in August, 2001.
What is ignored even more is that the entire Enron saga would almost certainly not have occurred at all had Lay’s choice for Enron CEO been Kinder ten years ago.
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The jury in the first re-trial of the Enron Broadband case that ended in a mess of acquittals and a mistrial last year convicted former EBS CFO Kevin Howard (picture on the left) this afternoon on all five counts — three counts of wire fraud, two counts of falsification of books and records and conspiracy to falsify books and records. Howard’s co-defendant — former EBS accountant Michael Krautz — was acquitted on all counts. The previous posts on this case are here, including this recent one on the closing arguments of the trial.
I’ve had to turn off comments for awhile because of an extensive spam attack. I will turn the comment feature back on once I’ve figured out how to stem the attack, which should be shortly.
