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Kinder Morgan to Buy El Paso Corp. (Update1)

Updated from 5:08 p.m. EDT with deal details, background on Kinder Morgan's purchase of El Paso.

NEW YORK ( TheStreet) -- Kinder Morgan (KMI - Get Report) has agreed to buy El Paso (EP) for $21.1 billion in a cash and stock deal.

The transaction, which values El Paso at $38 billion including El Paso's outstanding debt, creates the largest network of natural gas pipelines in the U.S. and is the largest energy merger this year.

It's also the second largest takeover this year after AT&T's (T) $39 billion purchase of T-Mobile in March, although that deal has been blocked by the U.S. Department of Justice on antitrust concerns.

Kinder Morgan and El Paso announced the transaction in a news release Sunday.

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The deal values El Paso shares at $26.87 each, a 37% premium to their closing price Friday of $19.59. It also represents the highest price for the company's stock since it went public in 2006.

Kinder Morgan will pay El Paso $14.65 a share in cash and will contribute its shares at a ratio of 0.41 and its warrants at a ratio of 0.64 to El Paso shares to assume all of its outstanding stock. The deal is expected to close in mid-2012 and will give Kinder Morgan shareholders a 68% ownership of the combined company; El Paso shareholders will own the remaining 32%.

"This once in a lifetime transaction is a win-win opportunity for both companies," Kinder Morgan founder and CEO Richard D. Kinder said in the news release. "The natural gas pipeline systems of the two companies are very complementary, as they primarily serve different supply sources and markets in the United States."

The combination will create the nation's largest natural gas pipeline and biggest independent transporter of petroleum.

It also will create the fourth largest energy company in the U.S., according to the news release.

As part of the merger, Kinder Morgan will sell El Paso's oil and gas exploration and production assets to help pay for the deal. It also expects the combination to boost shares immediately because of the cash flow of the combined companies.

Kinder Morgan also said it has a commitment from Barclays Capital (BCS) to raise the nearly $15 billion in funds required for the cash portion of the purchase.

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