In a bid to create a giant pipeline company, Kinder Morgan (NYSE:KMI) bought natural gas energy company El Paso (NYSE:EP) over the weekend for $21 billion.
The cash-and-stock transaction, which was unveiled on Sunday, values Houston-based El Paso at a 37% premium to its Friday close.
The companies said by joining forces, they will create the largest midstream and fourth largest energy company in North America. The combined company will own about 80,000 miles of pipelines and be the No. 1 U.S. independent transporter of petroleum products.
"This once in a lifetime transaction is a win-win opportunity for both companies," said Kinder Morgan CEO Richard Kinder, who will stay on as the combined company’s CEO, in a statement. “The transaction is expected to produce immediate shareholder value (upon closing) through strong cash flow accretion and offers significant future growth opportunities."
Kinder Morgan said it will pay El Paso shareholders $14.65 in cash, 0.4187 of Kinder stock and 0.640 of warrants for Kinder stock for each share they own. When debt is included, the total transaction value rises to $38 billion.
Kinder Morgan shareholders are seen owning about 68% of the combined company at closing; El Paso holders will own the remaining 32%.
Kinder Morgan said the deal, which needs to be approved by shareholders from both companies, is expected to close in the second quarter of 2012. At that point, El Paso will become a subsidiary of Kinder Morgan. The combination is expected to generate savings of about $350 million a year.
"We are very pleased to become a significant part of this combined enterprise and offer our shareholders the opportunity to participate in what we believe will be North America's preeminent infrastructure company,” El Paso CEO Doug Foshee said in a statement.
Shares of El Paso leaped 22.46% to $23.98 Monday morning, while Kinder Morgan’s stock jumped 5.91% to $28.47.