Last week, Kinder Morgan (NYSE: KMI) completed its purchase El Paso (EP), a Farallon holding. KMI also announced the sale of the EP E&P business for $7.2 billion. Upon closing, KMI revised upward it projected cost savings from $350 million to $400 million and upped the annual dividend as well from $1.35 to $1.40 per share. There will be additional FTC-mandated asset sales likely in Q3 as KMP agreed to sell within six months from May 1 order date; value of the assets are estimated $3.5 billion with $350 million in EBITDA. We would also not overlook the NOL from the EP business that will pass to KMI, of which we think over three billion was used to offset taxes from the E&P gain. The fundamentals look strong with little commodity exposure and the newly structured company should perform well with additional FTC-mandated asset sales and Tennessee Gas drop downs.
Goodrich (NYSE: GR) is another company in the process of being bought. United Technologies (NYSE:UTX) is the acquirer and the deal should close this year. GR’s Q1 earnings did not give us a vote of confidence with organic growth of only 5% versus 18% in 4Q11 and 13% in FY2011. There were some one-time charges for restructuring and environmental expenses. Regional and business jet original equipment sales grew a paltry 2%, which may indicate a trough, so given the state of the market GR makes for an interesting acquisition. On one hand, since it is among the more levered companies in the space, it should outperform in a recovery but will be particularly vulnerable if the recovery is weak or does not take place. Other investors include Frank Brosens, Mike Donatelli, and Robert Millard.
Owens (NYSE: OI) is a glass container manufacturer selling in to Europe, North America, South America, and Asia Pacific. It is the market leader of glass containers for alcohol, food, tea, and other products, generating over 25% of its sales in the emerging markets. Its customers include large food and beverage companies like Anheuser-Busch InBev, Diageo, Miller/Coors, and PepsiCo. We have had ongoing concerns about weakness in European sales though strength in North America should help balance that out. And with management’s confidence in its FCF target of $250 million in spite of inflation, we are slightly more constructive. Valuation also seems reasonable with OI is trading at ~5.7x 2012E EV/EBITDA, discount to the group’s ~7.1x multiple.
Hudson Pacific Properties (NYSE: HPP) guided its 2012 FFO downward from $1.00 to $1.04 to $0.83 to $0.87 per share, due to the acquisitions and equity offering. And with management indicating a low initial return on the Market Street and Olympic Bundy media campus due to low initial occupancy, we are increasingly negative on valuation implications. Management expects the properties to contribute $0.4 million of NOI this year, which translates into a ~1% yield on an initial investment of almost $180 million, which is suboptimal. The equity offering – total net proceeds were $190.8 million and total shares issued were 13.2 million- was more dilutive than we had expected. We think that with the leasing issues and recent acquisitions with high vacancies, HPP should trade at a discount to peers like Douglas Emmett (DEI) and Kilroy (KRC).
