Reuters
Deals
Apollo-led group to pay about $7.15 billion for El Paso assets
Fri, Feb 24 20:56 PM EST

By Michael Erman and Greg Roumeliotis

NEW YORK (Reuters) - A consortium led by private equity firm Apollo Global Management (APO.N) struck a deal to acquire El Paso Corp's EP.N oil and gas exploration and production business for about $7.15 billion, in the largest leveraged buyout deal of the year so far.

The Apollo group also includes private equity firm Riverstone Holdings, billionaire Len Blavatnik's Access Industries and other parties, El Paso said in a statement on Friday.

Kinder Morgan Inc (KMI.N) is selling off the business, which it would have picked up as part of its $21 billion deal to buy rival El Paso late last year. Because Kinder Morgan was only interested in El Paso's pipeline assets, it promptly put the E&P business on the block, hoping to use proceeds from the sale to reduce the cost of the original deal.

The Apollo deal is contingent on the completion of the Kinder Morgan, El Paso deal, which is expected to close in the second quarter.

The $7.15 billion price tag is lower than many expected when Kinder Morgan agreed to buy El Paso in October. Analysts had projected then that the unit could be worth over $8 billion.

According to one source familiar with the matter, bidding on the unit opened at around $7.5 billion. But natural gas prices have fallen more than 30 percent since October to $2.55 per million British thermal units, driving down the value of the unit.

El Paso's oil and gas assets include acreage in the Eagle Ford field of south Texas, one of the most lucrative producing areas in the country, as well as the Haynesville shale in Louisiana and stakes in offshore Brazil fields and in Egypt.

Kinder Morgan and El Paso also explored a piecemeal sale process for the exploration and production business. But the private equity consortium believes that it had the upper hand because of possible tax losses and other closing risks that would arise in a piecemeal process, two sources familiar with the situation said.

PRIVATE EQUITY DRILLS FOR PROFITS

Private equity firms have flooded the U.S. oil and gas sector with billions of dollars in recent years, buying assets from energy firms thirsty for capital to help them drill in expensive and challenging areas.

Last year's second-largest leveraged buyout came from the energy space, as a consortium led by private equity firm KKR & Co LP (KKR.N) paid $7.2 billion for privately held oil and gas group Samson Investment Co.

The Apollo deal provides a jump start to what has been a slow year for leveraged buyouts. Private equity-backed mergers and acquisitions totaled $15.9 billion worldwide year-to-date before the deal was announced, a 33 percent decline year-on-year, according to Thomson Reuters data.

Apollo, whose investments include casino operator Caesars Entertainment Corp CRZ.O, chemicals company LyondellBasell Industries NV (LYB.N) and real estate investor Realogy Corp, was co-founded by former Drexel Burnham Lambert bankers Leon Black in 1990.

"In natural resources there is an extraordinary arbitrage going on right now between the pricing of physical assets and what they are trading at in the markets so there are opportunities to buy proven reserves," Black told a private equity conference in San Francisco earlier this month.

"You can use sophisticated hedging techniques and lock in very attractive returns," he said.

The buyers have already arranged for $5.5 billion in financing for the El Paso assets, two other sources who are familiar with the financing arrangements said.

Citi and J.P. Morgan are the co-lead bankers on a $3.5 billion bridge to bond loan, while J.P. Morgan is the lead banker on a $2 billion revolving credit facility, the sources said.

Barclays and Evercore advised Kinder Morgan and El Paso on the sale, while RBC, Tudor, Pickering, Holt & Co., Citi and J.P. Morgan advised the buyers.

(Reporting By Michael Erman. Editing by Gunna Dickson and Carol Bishopric)


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