Monday, January 30, 2012

Apollo Getting Closer to Buying El Paso?

The Wall Street Journal reported over the weekend that private equity company Apollo Global Management is leading a group that is at the front of the line negotiating to buy the E&P unit of El Paso from Kinder Morgan once it completes the acquisition of El Paso.  If this happens it is a rare case where another PE company beats KKR to a domestic energy deal!

The price tag would be around $7 billion and fund about a third of the $21.1 Kinder will pay for EP.  Kinder is considering a sale of the E&P unit as a single entity or breaking it up and selling the pieces.  Often the sum is greater than the whole - especially if a buyer is willing to pay a premium for a particular asset - but it is easier to sell the package as a single entity.  Stay tuned.

With Mitt Romney's history in the PE industry making front page news, PE is getting more attention, but I would argue that it is still not well understood.  I've worked in the industry for a number of years and the one thing I can tell you is that EP would be bought to be resold.  Period.  I'm not sure how that would impact operations at EP, but it means that a PE owner is not going to sit around twiddling its thumbs waiting for gas prices to rise.  It will work hard to "create value."  What that overused term means in this case is that they will make the company look as valuable as possible - in this case, build reserves, cut costs through efficiencies (good, bad or otherwise) and boost production.

But what it also means is that the company likely would be sold or IPO'd in the next three to five years.  Sometimes that means slapping a lot of lipstick on the proverbial pig, and sometimes that means making something out of nothing.  Which will it be?  Only time will tell.

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