FTC Challenges Acquisition of Interests in Kinder Morgan, Inc. by The Carlyle Group and Riverstone Holdings

For Release

To Protect Competition, Carlyle and Riverstone Must Make Their Investment in Magellan Midstream Holdings Passive and Restrict Flow of Sensitive Information

The Federal Trade Commission today announced a complaint challenging the terms of a proposed $22 billion deal whereby energy transportation, storage, and distribution firm Kinder Morgan, Inc. (KMI) would be taken private by KMI management and a group of investment firms, including private equity funds managed and controlled by The Carlyle Group (Carlyle) and Riverstone Holdings LLC (Riverstone).

According to the FTC, Carlyle and Riverstone already hold significant positions in Magellan Midstream, a major competitor of KMI in the terminaling of gasoline and other light petroleum products in the southeastern United States. The proposed transaction would threaten competition between KMI and Magellan in eleven metropolitan areas in the Southeast, likely resulting in higher prices for gasoline and other light petroleum products.

The FTC’s order settling the complaint and allowing the transaction to proceed will ensure that competition between KMI and Magellan continues after the KMI buyout occurs. This will be accomplished by effectively turning Carlyle’s and Riverstone’s interest in Magellan into a passive investment, by requiring them to: (1) remove all of their representatives from the Magellan Board of Managers and its boards of directors, (2) cede control of Magellan to its other principal investor, Madison Dearborn Partners, and (3) not influence or attempt to influence the management or operation of Magellan. The order also requires Respondents to establish safeguards against the sharing of competitively sensitive information between KMI and Magellan.

“This is an example of the Commission acting to ensure that mergers and acquisitions involving energy firms will not lead to higher gasoline prices for consumers,” said Jeffrey Schmidt, Director of the Commission’s Bureau of Competition. “Just as important, this order demonstrates the Commission’s resolve to act against acquisitions of partial interests in competing firms in situations where competition would likely be diminished,” Schmidt added.

The Acquiring Group: In addition to Carlyle, Riverstone, and KMI management, firms in the acquiring group include affiliates of Goldman Sachs Capital Partners and American International Group. Through the proposed transaction, Carlyle and Riverstone would acquire a combined 22.6 percent interest in KMI. A private equity fund controlled and managed by Carlyle and Riverstone already holds a 50 percent interest in the general partner that controls Magellan.

The FTC’s Complaint: According to the Commission’s complaint, the proposed acquisition violates Section 7 of the Clayton Act and Section 5 of the FTC Act because investment funds controlled by Carlyle and Riverstone would hold interests in both KMI and Magellan, leading to a reduction in competition in the terminaling of gasoline in eleven markets in the Southeast where customers have few competitive alternatives. These markets include: (a) Birmingham, Alabama; (b) Albany, Georgia; (c) Atlanta, Georgia; (d) Charlotte, North Carolina; (e) Greensboro, North Carolina; (f) Selma, North Carolina; (g) North Augusta, South Carolina; (h) Spartanburg, South Carolina; (i) Knoxville, Tennessee; (j) Richmond, Virginia; and (k) Roanoke, Virginia.

The proposed acquisition would reduce competition because Carlyle and Riverstone would have the right to board representation at both firms, the right to exercise veto power over actions by Magellan, and access to non-public competitively sensitive information from or about KMI or Magellan. The proposed transaction would make it easier for the acquirers to exercise unilateral market power because many of KMI’s and Magellan’s terminals are customers’ first or second choices, and other terminals may be either unable or unwilling to replace the competition that would be lost through the transaction as proposed. In addition, the transaction would increase the likelihood of coordinated interaction between competitors in the eleven markets, as it would combine, through common partial ownership, two of the primary independent participants in these markets.

The complaint also states that entry into the market for terminaling of gasoline and other light petroleum products in each of the relevant markets in the southeastern United States is not likely to be timely or sufficient to deter or counteract the alleged anticompetitive impacts of the transaction.

The Consent Order: The FTC’s consent order is designed to remedy the competitive harm resulting from the proposed acquisition of equity interests in KMI by Carlyle and Riverstone. Under its terms, representatives of Carlyle and Riverstone will be prohibited from serving on any Magellan boards, and from exerting any control or influence over Magellan, as long as they hold any interest in KMI. In addition, Carlyle and Riverstone are required to set up procedures to prevent the exchange of competitively sensitive nonpublic information between KMI and Magellan. The agreement and order will ensure that KMI and Magellan are operated independently and in competition with one another, and will remedy the lessening of competition that likely would result from the transaction as proposed.

The order contains a range of other terms, each of which is detailed in the FTC analysis to aid public comment that can be found as a link to this press release on the Commission’s Web site. In particular, the order requires that an independent monitor be put in place to ensure that the parties’ procedures to restrict the flow of sensitive information are effective. The parties have selected, and the Commission has approved, Kevin Sudy, an associate director at Navigant Consulting, as the monitor. He will serve in this position until the parties have fully established the required procedures. The Commission may reinstate the monitor if necessary to ensure the parties are complying with the terms of the order.

There is a separate order to maintain assets, requiring Carlyle and Riverstone to adhere to the terms of the order during the time leading up to their acquisition of the KMI interests. The order will terminate in 10 years.

The Commission vote to approve the consent order and place a copy on the public record was
3-1, with Commissioner Jon Leibowitz voting no and Commissioner J. Thomas Rosch recused. The FTC will be accepting comments on the order for 30 days, until February 26, 2007, after which it will decide whether to make it final. Comments should be sent to FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, consent order, and an analysis to aid public comment are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.shtm.

MEDIA CONTACT:

Mitchell J. Katz,
Office of Public Affairs
202-326-2161

STAFF CONTACT:

Dennis F. Johnson,
Bureau of Competition
202-326-2712

(FTC File No. 061-0197)

 

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