Pe deals of the year

Introduction: Mission accomplished (mostly)   Terra Firma-EMI   3G-Burger King   BankUnited   Kinder Morgan   THL-Warner Music Group   Carlyle-China Pacific   Arcos Dorados   Sequoia-LinkedIn   Sun Capital-Bruegger's   Cerberus-Talecris   Court Square-FiberTech   Second best of the best

Revenge is sweet several times over for Kinder Morgan Inc. chief executive Rich Kinder. He formed the company in 1996 after leaving Enron Corp. because it didn't look as if he was going to succeed Ken Lay as CEO anytime soon. He started by gaining control of a natural gas liquids pipeline Enron didn't want and went on to build an energy transportation and storage colossus.

His payday came when he and his private equity partners took the company public for the second time. On Feb. 11, Kinder Morgan sold 95.5 million shares in an initial public offering at $30 apiece, raising $2.86 billion, well above its original plans to sell 80 million shares between $26 and $29 per share. Not only was it the largest U.S. energy IPO since 1998 (when Conoco Inc. raised $4.4 billion), it was the largest buyout-backed IPO ever.

Kinder Morgan's sponsors made a killing. The consortium, which includes Goldman Sachs Capital Partners, Carlyle Group, Highstar Capital LP, TCG Holdings LLC and Riverstone Holdings LLC, emerged with a 192% partly realized gain on the $5 billion they sank into the $22.4 billion buyout in May 2007, at the time the second-largest buyout in history.

Kinder also did well. He invested $2.4 billion of equity and showed a 192% gain, including his share of dividends. The IPO set a value on his 30.6% stake of nearly $6.5 billion.

The stock hasn't exactly taken off since the IPO: It soared as high as $32.14 per share then slid as low as $26.87 before settling around the offering price. But the sponsors' remaining 50.1% stake (and Kinder's 30.6%) is still worth a lot and will only get more valuable; Kinder is a stable company with high barriers to entry that generates lots of cash. It's also expected to pay an annual dividend of almost 4%, which Morningstar Inc. analyst Jason Stevens expects will grow by nearly 11% per year. "Kinder Morgan is an instant blue chip," Francis Gaskins, president of ­IPOdesktop, gushed at the time.

Kinder's owners didn't take dividends for a couple of years, instead using the company's ample cash flow to pay off buyout debt. Unlike many PE-backed companies lately, when they did take dividends in 2009 and 2010, they tapped the company's internal cash production rather than piling on more debt to fund them.

"These guys have retired all the LBO debt and some of the legacy debt. That's remarkable," CreditSights Inc. analyst Andrew DeVries said at the time of the IPO, comparing it with every other jumbo-sized enterprise taken private at the peak of the 2005-'08 leveraged buyout boom. "You're looking at leverage of [just] 2 or 3 times."

DeVries says there were no real comparables. Ninety percent of Kinder Morgan's cash flows come from general partner and limited partner interests in publicly traded master limited partnership Kinder Morgan Energy Partners LP, or KMP. Other owners of general partners in pipeline master LPs have significant other assets.

However, DeVries notes that the general partner's cash flow, judged by the publicly traded Energy Transfer Equity LP, traded at about 20 times those distributions. So if you valued the LP units Kinder Morgan owned of KMP by market price and then gave the company credit for the 20% of the Natural Gas Pipeline Co. of America it owns at 10 times Ebitda, that gets you to $23.8 billion, which is where the company traded at the IPO. "However, it's trading on dividend yield, and it will go higher because it's a play on growth at KMP," he says.

Getting the buyout closed wasn't exactly a cakewalk. Analysts criticized the $100 per share offer as low, despite a respectable 18.5% premium, and the board's special committee was able to extract a higher price of $107.50 a share, a 27% premium. Kinder and other managers even took a haircut at $101 per share to get the deal done.

Shareholders still weren't thrilled. Two class actions were filed, claiming the deal cheated stockholders on the value of the $4.4 billion Rockies Express pipeline and $500 million Kinder Morgan Louisiana pipeline, two projects financed by shareholders but whose benefits would be reaped by the new owners. A special master heard arguments but recommended denying the injunction.

There were regulatory issues, too. The Federal Trade Commission said the deal threatened to eliminate competition in the terminaling of gasoline and other light-­petroleum products in 11 metro areas. Two PE participants, Carlyle and Riverstone, agreed to convert their interest in one of Kinder's competitors, Magellan Midstream Holdings LP, into a passive stake.

Still, less than four years later, it looks like it was worth it, with Kinder still on top. "I don't care if we make the Fortune 500," he said to The Deal a decade ago. "We have an incentive to grow this company." He did -- and he still does.