Kinder Morgan Energy Partners LP (NYSE:KMP) has taken a giant stride towards acquiring Copano Energy, L.L.C. (NASDAQ:CPNO), in a deal worth about $3.2 billion. The completion of the deal will give Kinder Energy access to oil and gas-rich territories in Texas, Wyoming and Oklahoma. The shale gas exploration industry has gained popularity over the recent past and companies are grappling to have a share of the cake before it runs out.
According to the acquisition details as summarized by Deutsche Bank, Kinder Morgan Energy Partners LP (NYSE:KMP) will pay $40.91 per unit of Copano Energy, which equates to approximately 23.5 percent premium as per Tuesday’s closing price of $33.13 per share. Kinder Morgan will credit Copano Energy shareholders with 0.4563 of its shares per every share of Copano Energy, L.L.C. (NASDAQ:CPNO) acquired.
Copano energy has 78.9 million shares of common stock outstanding, which translate to just over $3.2 billion, in common equity as per the closing price yesterday. Other units including preferred equity and phantom units and restricted units are valued at $544 million while total debt stood at nearly $1.1 billion as per 3Q12 filing. The company’s most recent quarter cash and equivalents was reported at $53.5 million. The total deal including the debt and cash is, therefore, estimated at $4.8 billion.
While the premium might seem too high for the oil and gas company, this deal might prove a bargain within months. Copano Energy expects to pay a dividend of $2.415 per unit in 2013, which translates to a yield of 6% based on the $40.91 acquisition price per unit. This will results in a premium of approximately 1.6% per the estimated value $40.25 for one unit of Copano Energy.
In a nut shell, this suggests that even before the impact of the deal, Copano Energy shares were undervalued. The deal will also help Kinder Morgan diversify deeper into natural gas gathering, processing, and fractionation, fields where Kinder Morgan has not historically played a large role. This would also mean that any change in per gallon prices would impact Kinder Morgan’s margins, with Goldman Sachs analysts estimating that a change of $0.05 per gallon would result in about $5 million impact on margins or two percent.