This post has been updated
In a world where giant corporations are attempting multi-billion-dollar foreign mergers to duck America’s corporate tax rate, it seems odd that a massive company would reorganize in a way that tacks on a huge tax bill. But the oil pipeline company Kinder Morgan is doing exactly that with a $44-billion deal where it acquires all of its subsidiaries and combines them into a conventional publicly traded company.
Kinder Morgan’s co-founder and CEO Richard Kinder pioneered the corporate structure he’s now abandoning, the Master Limited Partnership. Designed specifically for companies focused on natural resources, the structure allows the firm to pay no corporate taxes by passing along all profits to shareholders and the partners, who run a number of subsidiary companies. The tax freedom is attractive, and investors love the high returns.
But the amount that the company has to pay out to investors has become a big hindrance (paywall). In order to keep paying out big and growing dividends, the company has had to constantly buy up new and productive assets.
Kinder Morgan’s partnerships had grown so much that there weren’t all that many deals that were attractive or big enough to make a dent. And to keep up with the pay-outs, actually pulling all that cash together was increasingly a problem.
The deal, which also adds a significant amount of debt, makes Kinder Morgan one of the largest energy companies in the world, giving it an estimated enterprise value of $140 billion according to the New York Times (paywall).
The deal’s structure will somewhat lighten the tax blow, but the company’s statutory rate will be substantially higher. (Update: (August 11) As Matt Levine points out, since the limited partnerships paid so much money to Kinder Morgan in the first place, simplifying income streams and taking deductions on the assets it’s acquiring looks like it will net the company significant tax savings over 14 years, despite the higher statutory rate)
Stability, simplicity and freedom are apparently worth paying for. The new structure will allow for bigger, more rapid investments over a longer time period, as the company tries to take advantage of an oil and natural gas boom in the United States.
While taxes are corporate America’s favorite bogeyman, apparently the contortions required to avoid them aren’t always worth the trouble.