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



) --

Kinder Morgan

(KMI) - Get Report

has agreed to buy

El Paso


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


(T) - Get Report

$39 billion purchase of


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


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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

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to raise the nearly $15 billion in funds required for the cash portion of the purchase.

Both companies' boards have approved the merger and will be presenting it for shareholders votes in a special meeting in January 2012.

El Paso's largest shareholder is

Icahn Capital Management

, whose near $1 billion holding in company shares is the activist fund's third largest holding after

Motorola Mobility

(MMI) - Get Report


Motorola Solutions

(MSI) - Get Report


In August, Motorola Mobility was sold to


(GOOG) - Get Report

for $12.5 billion -- a premium of more than 60%.

Kinder Morgan's largest shareholder is CEO Richard D. Kinder, who holds almost $6 billion worth of shares in the company he founded in 1997.

Goldman Sachs

(GS) - Get Report

is its second largest shareholder with more than $3.6 billion. The investment bank, along with

The Carlyle Group's

Riverstone fund,

AIG Financial Products

and an AIG-related hedge fund called Highstar Capital, took the pipeline giant private in 2006 at $107.50 a share.

In February, they did a public offering of the company in one of the largest public offerings of the year. Shares have fallen more than 13% since the IPO, and they closed Friday at $26.89.

El Paso was founded in 1928 by a Texas attorney named Paul Kayser.

When the transaction is finished, Kinder will remain chairman and CEO of the combined company, which will run under the Kinder Morgan name and be headquartered in Houston.

Two El Paso directors will also be nominated to Kinder Morgan's board. According to the press release, El Paso has agreed not to solicit competing bids and, if the merger fails, it will pay Kinder Morgan a $650 million termination fee.

Although Kinder Morgan will assume a significant amount of debt as a result of the merger, will first sell El Paso's exploration and production businesses for cash proceeds to Kinder Morgan that will lower debt levels needed to make the acquisition. In addition, it will sell El Paso's gas pipeline business to

Kinder Morgan Energy Partners



El Paso Pipeline Partners


over the next few years.

The remaining pipeline operations account for nearly 70% of El Paso's revenue, according to company filings.

The company also said that El Paso's net operating loss carry-forwards will offset taxes associated with this sale. Kinder Morgan Energy Partners and El Paso Pipeline Partners are both expected to raise money through stock and debt sales to buy the exploration and production assets.

Kinder Morgan said it would expect to pay a dividend of $1.45 a share in 2012, a big increase from the $1.20-a-share dividend for 2011. The company also expects its dividend to grow 12.5% a year through 2015, an increase from its previously forecast 10% growth.

By the end of 2015, Kinder Morgan said it expects its assets to consist almost exclusively of its general partner interests in Kinder Morgan Energy Partners and El Paso Pipeline. At that point, significantly more than 80% of Kinder Morgan's cash flows are expected to come from the general partner interests in its pipeline businesses.

Evercore Partners

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and Barclays Capital were the financial advisers to Kinder Morgan.

Morgan Stanley

(MS) - Get Report

was the financial adviser to El Paso.

The merger is a boost to dealmaking markets, which have cooled significantly since the beginning of the summer.

According to quarterly numbers released by financial data firm


this month, global merger and acquisition activity fell 19% in the third quarter, the poorest performance of the year, after rising by more than 20% in each of the first two quarters of 2011.

After starting on its best merger pace since 2008, M&A is tracked at its worst level since the second quarter of 2010, making the risk of a double-dip in the deal market for 2011 a reality.

For banks relying on deals for fees, the slowdown has hurt earnings. On Thursday,


(JPM) - Get Report

reported that its investment banking fee revenue fell 46% to $1.04 billion, after growing 23% and 37% in the first and second quarters respectively when compared with 2010. It's currently the highest earning investment banking operation and seen as a harbinger for a slowdown in other investment bank earnings this quarter.

-- Written by Antoine Gara in New York