UPDATE 3-Kinder Morgan to fold units into one company in $70 bln deal

Sun Aug 10, 2014 7:49pm EDT

(Adds details on deal, concerns about MLPs, background)

Aug 10 (Reuters) - Top U.S. pipeline company Kinder Morgan Inc said on Sunday it will put all its publicly traded units under one roof in a $70 billion deal that responds to investor concerns about its growth prospects and complicated financial structure.

The oil and gas pipeline company said it would shed the tax-advantaged legal structure it had popularized during the U.S. shale boom, the Master Limited Partnership (MLP), and fold its units into one company with a market capitalization of $92 billion organized as a C-corporation.

The affected units include Kinder Morgan Energy Partners LP , Kinder Morgan Management, and El Paso Pipeline Partners.

Chairman and Chief Executive Officer Rich Kinder had been under pressure from investors and last month on Kinder Morgan Partners' second-quarter earnings call said combinations of the Kinder companies were being evaluated.

A source familiar with the deal said Kinder Morgan's overall valuation had suffered because it traded as four entities and the market struggled to understand it.

The MLP structure also required the units to hand over much their cash to general partners, hurting its ability to make acquisitions that will now be easier to carry out, the source added.

More broadly, MLPs have been coming under greater scrutiny. The Internal Revenue Service this year halted approvals for new ones that strayed from the traditional pipeline model, while some investors have said their weak corporate governance standards expose minority investors to added risks.

The company expects the deal to close by the end of the year.

"This combined entity will be the largest energy infrastructure company in North America and the third largest energy company overall," CEO Kinder said in a statement.

In a July note to clients, analysts at Houston-based investment bank Tudor, Pickering Holt said the Kinder companies had underperformed for the last two years, held back by a "stubbornly high cost of capital" even though since 2012 about $40 billion in deals were struck that were intended to jump-start growth.

An email sent to clients of independent research firm Hedgeye Risk Management last year called Kinder Morgan and its associated companies "a house of cards."

Barclays and Citi acted as financial advisors to KMI, Barclays is providing committed financing for the transaction, and Weil Gotshal & Manges and Bracewell & Giuliani acted as legal counsel to KMI, according to the statement.

Jefferies acted as financial advisor to KMP and KMR and Baker Botts acted as legal counsel to KMP and KMR. Tudor, Pickering, Holt & Co acted as financial advisor to EPB and Vinson & Elkins acted as legal counsel to EPB. (Reporting by Mike Stone, Liana B. Baker and Luciana Lopez in New York, and Anna Driver and Terry Wade in Houston; Editing by Eric Walsh)