Federal antitrust regulators are scrutinizing private equity transactions more closely for potential anticompetitive effects—even transactions that result in the acquisition of only minority, non-controlling interests. Earlier this year, the Federal Trade Commission challenged the management-led buyout of Kinder Morgan, Inc. because two members of the private equity "club"1 participating in the transaction jointly owned an interest in one of Kinder Morgan’s competitors—Magellan Midstream Partners L.P. The two members were The Carlyle Group and Riverstone Holdings LLC, which were each to acquire an 11.3% equity interest in Kinder Morgan.
The FTC alleged that the transaction would threaten competition in, and result in increased pricing for, the terminaling of gasoline and other light petroleum products in the southeastern United States.
Although Carlyle and Riverside did not control Magellan outright, they had the right to designate members of Magellan’s board of directors, veto certain actions taken by Magellan’s board, and, according to the FTC’s complaint, had access to Magellan’s non-public, competitively sensitive information. The FTC alleged that those factors would alter the unilateral incentives of Kinder Morgan and Magellan to compete vigorously and would increase the likelihood of collusion or coordinated action between Kinder Morgan and Magellan.
Ultimately, the challenge resulted in a consent agreement that prohibits representatives of Carlyle and Riverstone from serving on any Magellan boards and from exerting any control or influence over Magellan, as long as these companies hold any interest in Kinder Morgan. In addition, the agreement requires Carlyle and Riverstone to set up procedures to prevent the exchange of competitively sensitive, non-public information between Kinder Morgan and Magellan.
The Kinder Morgan transaction illustrates that federal antitrust agencies will scrutinize, and may even oppose, transactions that result in minority cross-ownership of competing companies. In addition, federal antitrust regulators have demonstrated an increased interest in the practices of private equity firms generally (and particularly with respect to club transactions).
It would be prudent, therefore, to involve antitrust counsel early on to identify and overcome potential regulatory hurdles.
Footnote
1. Companies that pool their resources to pursue larger targets.
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