Kinder Morgan, Inc. Harvard Case Solution & Analysis

Kinder Morgan had a good record in transportation and distribution of energy. Kinder Morgan have a wide network of pipelines for natural gas, CO2, petroleum and other chemicals in United States and Canada. Kinder Morgan earned through two sources i.e. earnings from customer who paid to use the corporation’s transportation and infrastructure and earnings from Kinder Morgan Energy Partners in terms of management fee and profit sharing on managing pipelines. Richard Kinder is the current CEO of the company. In 1997 Kinder Morgan Energy Partners (KMP)was purchased for $40million. Kinder Morgan has increased their assets under management from $40million to over $35 billion.
Problem statement
The management of Kinder Morgan and investment banker from Goldman Sachs are considering to increase in the shareholder value of Kinder Morgan through maximizing their return from Kinder Morgan Energy Partners (KMP) for which they have two options available i.e. making Kinder Morgan a private entity or repurchasing shares of Kinder Morgan using asset proceeds.The special committee is currently in a dispute for approval of$22 billion offer to make theenergy company private $22 billion bid will include$3billion of equity roll over from management and board of directors, fifty one hundred million from financial sponsors and approximately fourteen billion from debt financing. Goldman Sachs Capital Partners (GSCP) is the only interested in potential leverage buy out of Kinder Morgan. However, special committee consists of Morgan Stanley and BlackStone held discussion with various third parties but none of them are willing to offer a competing proposal.
Conceptual error in RBC Valuation method
Analysts from RBC has provided on the basis of range of multiples i.e. not providing average or possible value, valuation of operating assets in Kinder Morgan is computed through range of multiples although it should be in solo.Assumption are used as price target for valuation of KMP and KMR holding.
Reason of error
Having a range of multiples will not provide single possible value thus there will be difference in low case and high case. If valuation will be taken through assumptionsTheresults may not provide a fair view, business valuation should be based on taking market influences rather than getting desired valuation on as desired valuation on assumption.
If the error resolve
If current values will be taken it will result in decrease of One hundred and eighty nine million which will eventually decrease the Kinder Morgan share price. Although on computing through taking average of the multiple and market prices of each item the value per share was one hundred and seven.
Standalone value of the GP
Standalone value of the GP is the difference of implied market valuation for KMP holding and publicallytraded units. Standalone market valuation is negative seven hundred and nineteen million.
Motivation for this repurchase
Repurchasing means buying securities from shareholders on market value. Buying back the outstanding share a simple way to pay off investor and reduced cost of capital as the business paying return to their equity holders. Buying back the investment for a company will result in reducing rights of shareholders including their voting rights to not consider for strong decision making power. Another factor that might involve to increase the company’s share price is the tax shield that would allow to increase the net earnings and perform positive indication over the earnings per share as well as dividend payout ratio. Thus it can be said that if such a scenario would implement then the overall company’s performance would be directly proportional to sustain the level of prices according to the certain benchmark level................

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