The early headlines on Kinder Morgan’s (NYSE: KMI) plan to buy out its two affiliated master limited partnerships looked something like this:

RICH KINDER EXITS MLPS IN $70 BILLION DEAL

Which is true as far as it goes, because Kinder Morgan and its CEO really are saying goodbye, for now, to the vaunted tax advantages of MLPs, especially as they apply to limited partners.

But it would be just as true to write:

KINDER SPENDS $4 BILLION TO LOWER LP PAYOUTS IN TAX ENGINEERING MOVE

Or, if saving space be the goal,

RICH KINDER IS A GENIUS.

Let’s move beyond the headlines. On Sunday, KMI announced a deal to buy out Kinder Morgan Energy Partners (NYSE: KMP), its dividend-paying proxy Kinder Morgan Management (NYSE: KMR) and El Paso Pipeline Partners (NYSE: EPB) in mostly-equity deals at premiums ranging from 12% for KMP to 16.5% for KMR based on the Aug. 8 closing prices.

KMP unitholders are to receive 2.1931 KMI shares and $10.77 in cash for each KMP unit. KMR shareholders would receive 2.4849 KMI shares for each KMR share. EPB unitholders would get .9451 KMI shares and $4.65 in cash per unit. KMP and EPB holders will be able to choose equity compensation instead of the cash payout. Assuming they don’t, the cash portion of the deal will cost KMI $4 billion.

For this price, limited partners will give up yield in the neighborhood of 7% for KMI’s 4.5% yielding dividend, which is now expected to increase 15% in 2015 and 10% in subsequent years through 2020. They will also give up the depreciation shield on the distributions provided by the partnerships, which will now benefit KMI at the company level to the tune of $20 billion over the next 14 years. And of course, if the deal closes as expected by the end of the year, long-term MLP unitholders will face a significant capital gains tax hit.

This is a great deal for KMI, which has been severely hampered by the fact that its largest MLP affiliate, KMP, had to issue equity yielding nearly 7% to finance growth. KMP would then have to turn over nearly half of the growth proceeds to KMI via incentive distribution rights, taking its effective cost of equity financing above 12%. Now KMI can issue equity yielding less than 5% and keep all of the proceeds from that investment. And the tax depreciation it will acquire from the MLPs under this deal, along with a stepped up basis for their assets following the transaction, is how a corporate family with aggregate annual distribution growth of maybe 5% transforms itself into the payer of a dividend that will grow twice as fast.

Source: company presentation

Which, of course, is great for CEO and founder Richard Kinder as the largest KMI shareholder, one who will now own 11% of the enlarged company after dilution with the extra shares worth $40 billion. It’s just as good a deal in the long run for other KMI shareholders as well, and this alignment of interests with the CEO is why we have been steadfast in recommending KMI as the preferred holding within the Kinder Morgan family.

As for unitholders of KMP and EPB, their takeout premiums must be weighed against the potential tax hit and the pending loss of a higher tax-deferred yield in favor of a smaller but faster-growing taxable dividend.

But, as Richard Kinder made clear on this morning’s conference call explaining the deal, the high cost of capital for these partnerships made growth initiatives difficult, if not unsustainable. This is a fact Kinder Morgan has until recently denied. Now that the problem has been solved, it could finally be acknowledged as a problem retrospectively.

Notably, it has been solved without an acquisition of KMI by KMP that would have immediately vested warrants issued by KMI to finance last year’s Copano acquisition, which are in the money above $40 per KMI share and would have diluted current shareholders by more than 30% had KMI been bought. As is, the warrants remain on track to be exercised in May 2017, and this fact more than any other is likely limiting the KMI share premium this morning.

By having KMI take out its MLP affiliates Richard Kinder also sidesteps potential allegations of self-dealing that could have been raised given the heavy concentration of his fortune in KMI. But make no mistake: while KMI is the acquirer it also looks like the long-term winner from this deal at the expense of KMP and EPB limited partners, who are getting a modest premium and a potentially immodest tax bill to sell near the recent lows.

Not only will KMI get the benefit of recent investments made by KMP without the drain of incentive payments, it also inherits KMP’s investment-grade credit rating, which alongside the reduced cost of equity capital, positions management to pursue new acquisition targets, as it has indicated it now will.

Portfolio Update

We’re reiterating our recommendation of KMI as the #5 Best Buy below $40, and would have raised that limit by now if not for the warrant overhang. Whether the warrants ultimately vest or not, the deal announced last night creates a lot of long-term value for KMI shareholders.

As for KMP, which we recently upgraded to Buy, we’re lifting the buy limit from $90 to $95. If KMI’s share price trends toward $40, as we believe will be the case over the near term, its buyout bid will be worth $98.50 to KMP unitholders.

KMP, KMR and EPB unitholders and shareholders must still approve a deal by majority votes. But with the boards of each entity lined up behind the deal, the risk that it will fall apart is low.