Master limited partnerships are ownership units which are traded on public exchanges. The Management of an MLP is usually centralized in its general partner, which is usually organized as a limited liability company and is often fully owned by a private entity or a publicly traded corporation which typically appoints the board of directors and management of the general partner (Mandell,A. (2021). The benefit of using MLPs is that no taxes are levied because the partnership structure is considered as a pass-through entity (El-Hage et al., 2008).
The primary source of value creation to Richard Kinder and the private equity team in this LBO
This is through the use of borrowing to finance the acquisition. This is highlighted by the break- down of the bid structure which included $3 billion of equity roll-over from management and Participating board members, $5 billion from financial sponsors and about $14 billion of debt (El-Hage et al., 2008, p.1) .The proportion of the value of the debt is large compared to the Other sources of value hence it is the primary source of value.
From the boards perspective was the price of $100 per share good?
Sections of the KMI board viewed the $100 per share offer negatively. This was demonstrated When shareholder Ronald Hodge filed a class-action lawsuit which described the potential buyout as massively inadequate and unfair (El-Hage et al., 2008, p.6).
What returns was the buyout group expecting at the initial offer price of $100 per share.
With the offer of $100 per share the group was expecting to receive an 18.5% premium over the closing price of the company’s closing shares as of May 26th, 2006 (El-Hage et al., 2008, p.16).
What returns was the buyout group expecting at recent offer of $107.50 per share. At the most recent offer of $107.50 per share the group was expecting to receive a 27% Premium on the company’s closing share of $84.14 as of May 26th, 2006 (Mouawad, 2006).
How would the private equity consortium increase its returns by 10% at the offer price of
$107.50 per share
This would be possible by generating a high growth rate in operating profits to boost the cash flow of the company over the period of the investment. They would also increase the value of the exit multiple of the EBITDA to a level corresponding to the desired percentage increase in returns. Finally, the private equity consortium would attempt to pay down the outstanding debt during the period they are involved with the company at a rate that would influence the company’s cash flows positively at the desired rate in order so as to achieve the Particular rate of increase in returns.
El-Hage,N.,Pierson,L.,Bierbrauer,E., and Chew,F.(2008). Kinder Morgan Inc-Management
Buyout. Harvard Business School. https://www.exed.hbs.edu
Mandell,A. (2021). Master Limited Partnership Research in Accounting, Economics and
Finance.The journal of American Taxation Association. https://ssrn.com/abstract=3873368
Mouwad,J. (2006).Kinder Morgan accepts $15 billion Buyout Offer. The New York Times.