Not creating value out of thin air, the value was already there but like beauty is in the eye of the beholder.
This post concerns the anomaly of 1+1 equaling 3, also known in less polite circles as (reverse) financial engineering.
From Bloomberg View:
(Corrects recipient of incentive distribution rights in the second and ninth paragraphs.)
The self-acquisition presentation
that Kinder Morgan filed today is a great thing to read if you're
interested in the question of whether and how financial engineering adds
value. One way of describing Kinder Morgan is that it is a big company
that owns oil and gas pipelines, with some shareholders who own its
stock and some bondholders who own its bonds. But that is not a strictly
accurate way of describing Kinder Morgan. In fact Kinder Morgan is not a
big company that owns gas pipelines. It's actually four big companies, each of which does some things relating to those pipelines, and each of which has its own investor base.
There's
Kinder Morgan Energy Partners (KMP), which is a publicly traded
partnership that owns a lot of pipelines. There's El Paso Pipeline
Partners (EPB), a publicly traded partnership that owns a different lot
of pipelines. There's Kinder Morgan Management (KMR), a publicly traded
limited liability company that manages KMP. And there's Kinder Morgan,
Inc. (KMI), a publicly traded corporation that runs the whole operation,
owns chunks of the other bits, and skims some money off the top of what
the partnerships take in.1
Each of the four bits has its own group of shareholders,2
and three of them have bondholders too. So you have roughly seven
different ways to invest in the Kinder Morgan enterprise, depending on
things such as your tax situation and your risk appetite and your need
for income and your particular asset preferences. It's highly engineered
to appeal to different investors in different ways.
And yesterday Kinder was like,
no, never mind, let's just mash it all back together. KMI will buy the
other three companies -- mostly for KMI stock, though there's a little
cash too -- and assume their debts and just be one big company that owns
gas pipelines, with its stock owned by shareholders and its bonds owned
by bondholders and no more of the headaches that come from managing
four different companies.
Now one obvious thing to say about this is that nothing is happening.
Before there were a bunch of people who owned stock in the Kinder
Morgan enterprise. Afterwards, the same bunch of people will own stock
in the Kinder Morgan enterprise, and it will be the same enterprise.3
So, in the aggregate, the value of their stock shouldn't change.
Perhaps one bit of the enterprise is getting a better deal in this
buyout, but that better deal is just coming out of the pockets of
another bit of the enterprise, and all in all the bits should balance.
The bits do not balance:
Basically, by re-shuffling papers Kinder Morgan has discovered
$12 billion of shareholder value. And not just shareholder value:
Usually a good way to find shareholder value is by taking it from
bondholders, but in fact here the bonds are also trading up, and the
enterprise's credit ratings are likely to improve.4
Every group of investors has made money. Kinder Morgan has created value from nothing....MORE
