Kinder Morgan Inc. (KMI - Analyst Report), the parent company of the master limited partnership (MLP) Kinder Morgan Energy Partners, L.P. (KMP - Analyst Report), plans to acquire El Paso Corp. () to create the largest natural gas pipeline system in North America.

The purchase price, including El Paso’s $17 billion outstanding debt, stands at $38 billion, representing the second largest merger agreement this year following AT&T Inc.’s (T - Analyst Report) $39 billion deal in March to buy Deutsche Telekom's T-Mobile USA.

The pipeline transaction is valued at $26.87 per El Paso share, comprising $14.65 in cash, 0.4187 in Kinder Morgan shares and 0.640 in Kinder Morgan warrants. It also represents a 37% premium over the October 14 closing price and a 47% premium to the 20-day average closing price of El Paso common shares.

Upon closing, which is slated for second quarter 2012, Kinder Morgan shareholders will own approximately 68% of the combined company and El Paso shareholders are expected to own the balance 32%. The Kinder Morgan-El Paso deal, one of the largest energy transactions in recent years, received no opposition from the board of directors of either company. Now, it requires customary regulatory approvals.

The combined entity, with an enterprise value of $94 billion, will be the owner of 67,000 miles of natural gas pipelines in North America as well as 13,000 more miles of pipelines for the transportation of refined products. Hence, the combined 80,000 miles of network will connect Kinder Morgan's pipelines in the Rocky Mountains, the Midwest and Texas with El Paso's extensive network spreading east from the Gulf Coast to New England, and west through New Mexico, Arizona, Nevada and California.

The transaction is expected to be immediately accretive to Kinder Morgan’s earnings and generate $350 million a year in cost savings, or about 5% of the combined companies' earnings before interest taxes, depreciation and amortization. The company also expects a boost in its dividend payments.

Additionally, Kinder Morgan intends to divest El Paso’s exploration and production assets in order to trim the high debt level that is expected to crop up from the takeover. By the end of 2015, Kinder Morgan expects its assets to exclusively comprise its MLP and El Paso Pipeline Partners L.P. (EPB - Snapshot Report) stakes, as well as the ownership of their respective shares and of Kinder Morgan Management LLC (KMR - Snapshot Report).

The deal will also enhance steady cash flow generation and promise growth for the company’s MLP, Kinder Morgan Energy Partners, which plans to acquire a significant portion of EL Paso’s natural gas pipeline assets over the next few years at attractive prices. For some several years to come, the average annual growth rate in KMP distributions per unit and KMR dividends per share is expected at around 7%, up 5% annually from the prior estimate on the back of likely dropdowns from this transaction.

Kinder Morgan Energy Partners holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. For the long term, we maintain a Neutral rating on the stock.