Monday, October 24, 2011

Shareholder Lawsuit In The Wake of Kinder Morgan's Privatization

A little over five years ago, Richard Kinder took Kinder Morgan private. At the time, I wrote this post about it and, later, one about the inherent unfairness of a management self-dealing against other shareholders in such a gone-private transaction. And what could be done to mitigate this,

"I reasoned something like the following would work. A sort of reverse greenmail. If a management tendered to take the firm private, regulation should provide for the offering of a similar ownership share in the newly-private firm, without voting rights, but with equity rights equal to that of the management's holdings. In effect, whatever management deals itself in for would be available to any shareholders who wished to stay on board for the ride. It would be interesting to see how such a change in the law to mitigate gross underpayment to existing shareholders by the buyout group would affect future private equity deals."

Harman Kardon actually did something like this when it went private in 2007.

So it was with interest that I read, amidst the heavy media coverage of Kinder Morgan's proposal to acquire El Paso, that some disenfranchised shareholders sued over the privatization that closed in 2007. According to a Wall Street Journal article,

"Angry shareholders filed a class action lawsuit contending he had structured the deal to his own benefit, shortchanging them. The company settled last year for $200 million.

In February of this year he turned around and spearheaded an initial public offering that issued nearly 110 million shares and raised roughly $3.3 billion."

The Journal piece says that Richard Kinder currently owns 31% of the firm, which "will have an enterprise value of $94 billion after the El Paso deal."

Kinder Morgan went private for $15.2B in 2007. It's paying $21.1B for El Paso, which means the enterprise value of Kinder Morgan before the deal is roughly $73B.

The Journal article doesn't say what percentage of the pre-privatization Kinder Morgan the disgruntled shareholders owned, but this webpage contends that the shareholders are receiving, before legal fees, only $2/share from the settlement, in addition to the original payment of $107.50. That's less than a 2% increase.

But Kinder Morgan insiders saw a roughly five-fold value increase (from $15.2B to $73B) in the firm's value. That's a huge amount of value which non-management shareholders were forced to forgo by Kinder's original private buyout.

With all of the data now available from before and after Kinder Morgan went private, it's evident that those deals by management insiders are unfair to the average shareholder who is not a member of senior management. They are forced to sell to insiders who would not be buying if they thought the price would likely prevent them from realizing their target return, or better.

I'm not a big fan of more SEC-supervised rules regarding the operation of companies or their ownership transactions. But this sort of self-dealing takes advantage of external shareholders and increases the animosity of the average American against those they believe take such unfair advantage.

Would it really have cost Richard Kinder and his team of insiders so much to allow those shareholders, prior to the company's going private in 2007, who wished, to exchange their voting shares for non-voting equity of equal value?

No comments: