Williams Cos. Inc. (WMB)

[eastunder]

Is Williams' Price Worth It for Energy Transfer?

By Investopedia | June 24, 2015

http://www.investopedia.com/stock-analysis/062415/williams-price-worth-it-energy-transfer-ete-wmb.aspx?partner=YahooSA

Earlier this week, Energy Transfer Equity (NYSE: ETE) made an unsolicited offer to buy out Williams Cos. (NYSE: WMB) for $48 billion, or about $64 per share for the pipeline company's existing shares. If you look at Williams' current financials, this is an extremely generous offer. Yet Williams' management said it actually undervalues the company. Is the company really worth more than this generous premium? And why is Energy Transfer willing to pay such a high premium for Williams' assets in the first place? Let's look at what Energy Transfer was thinking by offering so much for Williams, and whether it's worth upping the bid now that its target has rebuffed the offer.

Any which way but cheap
The $64-a-share proposal to Williams was a pretty significant premium to what the company was getting on the open market. Last week, prior to the announcement, Williams shares were trading at less than $49, so the Energy Transfer offer was close to a 33% premium on Williams' market value. When you look at it from a valuation standpoint, though, it looks like Energy Transfer was prepared to pay a king's ransom to get Williams compared to the valuations of similar master limited partnerships in the space. The table below is a comparison of Williams' valuation at Energy Transfer's offer price versus the current valuation of similar midstream companies

Company                    TEV/EBITDA       Price/Book Value 
 Williams Companies              28.2x             5.82x  
 Energy Transfer Equity          18.1x             49.5x  
 Energy Transfer Partners        14.2x              1.4x  
 Spectra Energy                  13.6x              2.9x  
 Enterprise Products Partners    16.3x              3.1x  
 Plains All American Pipeline    10.9x              2.1x  
 ONEOK Partners                  12.4x              1.7x 

Source: S&P Capital IQ.

That purchase price does seem a bit outlandish, but keep in mind that purchasing all of Williams Cos. also means retaining the incentive distribution rights to Williams Partners. If Williams were to accept the deal from Energy Transfer, it would require the termination of Williams' deal to purchase the remaining outstanding units of its partnership.

Paying for the future?
The other thing to consider is that Energy Transfer would be buying Williams' current earnings power and its book value, but also gaining access to one of the largest project portfolios in the midstream space today. Williams' $30 billion in potential growth projects is close in size to that of midstream giant Kinder Morgan, yet Williams is about half the size of Kinder Morgan.