Tuesday, August 12, 2014

Asking the Right Question About the Kinder Morgan Deal: Why Now? (KMI)

In commercial real estate you depreciate until you can't depreciate any more and then if possible do a 1031 exchange to get out of the property without paying cap gains. In estate planning you defer untaxed capital appreciation as long as possible to afford your heirs the opportunity to discover the wonder of a step up in basis. This is one of the driving issues in the sale of the Los Angeles Clippers, what are the tax implications?
It's all about the intertemporal and intrafamilial tax trades.

From FT Alphaville:

On the art of creating value from nothing
Bitcoin does it. Dogecoin does it. Gold miners do it. And now Kinder Morgan does it too.
What we’re talking about is the amazing ability to create value out of nothing.
The Kinder Morgan self-acquisition deal, which effectively found $12bn of shareholder value from a paperwork reshuffle, is probably the most high-profile example of mining shareholder value from good old fashioned financial ingenuity, even when it involves some finance reverse-engineering.

Matt Levine at Bloomberg has already done the heavy lifting on explaining the genius at play.
As he noted:
Usually a good way to find shareholder value is by taking it from bondholders, but in fact here the bonds are also trading up, and the enterprise’s credit ratings are likely to improve.4 Every group of investors has made money. Kinder Morgan has created value from nothing.
Of course, it did this by reversing financial engineering, which is a bit of an embarrassment, but a contingent one. If financial engineering can have negative value then it can have positive value too.
Some ways of slicing up cash flows seem to be more valuable than others, so it can be worth billions of dollars to find just the right way to slice up your cash flows. If you’re a skeptic of financial engineering this should trouble you, even though Kinder Morgan is scrapping its particular flavor of financial engineering as over-complicated and unworkable.
Except of course there isn’t really such a thing as a free lunch, and it’s always wise to look into the small print.

As Levine goes on to explain, what the new structure really does is allow Kinder Morgan to make a significant tax gain on the capital value of its units. Something in the region of $20bn in income tax savings over the next 14 years is expected from the new corporate structure to be exact.
The present value of those savings: $12bn....MUCH MORE including a/the answer to the headline question.
Earlier:
Kinder Morgan Creates Money Out of Thin Air