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Kinder Morgan, Inc. Management Buyout Case Solution
The management of the Kinder Morgan Inc. has furtively formulated a leveraged buyout program in which the stock holdings of some existing and new investors will be raised. The valuation by the relevant parties shows that any price exceeding $110 will generate a striking return to the shareholders. However, the factors of timing show that management has astutely chosen a very ‘suitable time’ for the transaction. The standstill agreement of Kinder is not healthy for shareholders as it does not allow prospective buyers to enter the competitive buyout process. In order to strengthen the decision-making process, Morgan Stanley should be excluded from the position of independent advisors. The Board of directors has taken an intelligent step of not opting for possible auction.
Following questions are answered in this case study solution
Conflict of Interest
Bond Rating, Future Outlook and Shareholder’s Wealth
Case Analysis for Kinder Morgan, Inc. Management Buyout
The key management personals of the Kinder Morgan Group considered the prospects of a Leveraged Buyout. Surprisingly enough, the board of directors of the company was kept in the dark in regards to the developing situation. This case provides crucial insights on the divergent interests of the management (from the board of directors). The entire situation demands close scrutiny to ensure that the shareholders ensure maximum gain from the LBO. Moreover, the validity and the relevance of the LBO itself are also objectionable. Regardless of the proposed premium for the shareholders, the situation needs to be examined from the perspectives of conflict of interests, private equity, and limited partnerships.
2. Problem Statement
Firstly, the underlying or proposed valuation of the LBO is the most potent factor that needs to be checked or revised. Secondly and most importantly, the conflict of interest between the management and the board of directors needs to be scrutinized. The notion that Morgan Stanley, the member of the special committee is also possibly linked to the LBO also raises questions about the transparency of the transaction. The question of whether or not the request of a standstill agreement by the board of directors to the bidding consortium is reasonable or unreasonable is also a part of the discussion. The subsequent bond ratings of the company, the future outlook, and the shareholder’s wealth maximization are also some factors that demand special attention.
3. LBO Valuation
The RBC capital market valuation presents a fair deal of assumptions and numbers. However, in order to calculate the enterprise value of KMI, RBC Capital used the stock price of April and subtracted the year-end net debt (debt minus cash) from the market capitalization. This disparity in the numbers should be removed. The net debt of the first quarter should be used to estimate the enterprise value. Underlying valuation by the advisors contains some realistic assumptions about the perpetuity growth rate (not more than 4.3%) and the cost of capital. However, the DCF analysis does show that under certain assumptions, the bid price can exceed $110. Another critical factor relates to the robustness of the debt market. There is quite a possibility that the debt markets may not remain vigorous enough the support the $12 billion debt.
4. Conflict of Interest
In any leveraged buyout, the biggest conflict of interest arises when the management (in the current case Richard Kinder) values the company in such manners in which they gain personal benefit and do not maximize shareholder’s wealth. This inherent backdrop does not allow the management to perform their fiduciary duties well. In this situation, the board of directors should ensure that the shareholder’s wealth is maximized. The offered price by the Bidder maintains a premium of 27% over the current share price. In essence, the management (Richard Kinder, etc.) have done a good job by adequately valuing the company. The analysts’ targets in Exhibit 8 also confirm that the $107 price is not against the adequate welfare of shareholders. However, one huge allegation can be made against the Kinder Morgan group. As management is an ardent participant of the business, it possesses the unique knowledge of the share price movements. Kinder and fellow participants are timing the LBO at such a stage where they consider the base price of $86. The share price movement proves that the stock of KMI has to potential to surpass a $100 price mark without any ‘market speculation’. In this situation, the management is, in fact, only providing shareholders with a meager premium of 6-7%. Rational thinking also points out that Management is utilizing its experience to lure the shareholders in the ‘premium trap’. A subsequent public offering can yield tremendous profit for management in the short to medium run (due to the timings of the transaction). It is the duty of the special committee appointed by the board to take into consideration the timing factor.
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