Energy Transfer Equity LP (NYSE:ETE) and Williams Companies’ Inc.’s (NYSE:WMB) $37.7 billion merger is on the verge of falling part, owing to increasing differences between the two, and challenging market conditions. Analysts who had previously expected the deal to be finalized over the coming months, are now expecting a break-up.
Since Energy Transfer had offered to pay $6 billion to Williams Companies shareholders, the deal was a win-win. With the acquisition, Energy Transfer CEO and chairman Kelcy Warren wanted to build the world’s biggest owner and operator of an oil and gas pipeline network. He had expected the cost and revenue synergies to stand at $2 billion.
The ongoing dispute between the managements at the two companies, along with a prolonged decline in commodity prices, is forcing the deal towards its end. The multi-billion dollar merger, which could have resulted in one of the world’s biggest energy infrastructure companies, took around seven months to reach this stage.
The ongoing problems have convinced traders and analysts that the deal will not close. Last month, Evercore ISI analyst Timm Schneider conducted a survey of clients, finding that around 50% of his clients expected the deal to be finalized. However, owing to the worsening market situation, the spread coming from those expecting the merger to break apart has increased. According to Bloomberg, the spread has more than doubled since April.
The reaction of analysts can be gauged from the fact that instead of pricing the companies together, the sell-side firms have started valuing the energy giants individually. Raymond James & Associates analyst Darren Horowitz also mentioned that he is adjusting Williams Companies’ valuation to take into account the current situation. His current valuation is taking “Energy Transfer out of the picture.”
Plunging Deal Value
Since the announcement of the deal, United States Brent Oil Fund, LP (NYSEARCA:BNO) has fallen almost 16.5%, while United States Oil Fund LP (ETF) (NYSEARCA:USO) has dropped 25.5%. The continuous decline in oil prices has eroded investor confidence regarding both the companies, and has increased the merger arbitrage. Energy Transfer shares have plunged 44% since September 28, while Williams Companies shares have dropped over 52.5%.
The low oil and gas prices have made Energy Transfer’s offered price expensive. Including debt assumption, the deal was worth more than $37 billion in September. However, it is now valued at less than $20 billion. The cash portion of $6 billion, which was just a small part of the initial proposal, now carries a high weightage in the offer.
Low Oil Prices: Not the Only Reason
Apart from weak commodity prices, the clash between the two companies has also raised doubts about the completion of the merger. The conflict erupted in March, when Energy Transfer issued preferred units to some of its investors. Williams Companies had previously rejected a proposal to offer common units to the general public. Thus, in order to finance part of the deal, Energy Transfer issued new shares in a private placement, without Williams Companies’ approval. Mr. Warren also received 50% of the new shares in the private offering. He already owns 18% of the company.
Dissatisfied with the offering, Williams Companies deemed it “malicious.” It said with the private placement, Energy Transfer has breached the terms of the merger agreement and has given preferential treatment to some of its shareholders against others. The company later filed a law suit against Energy Transfer and Mr. Warren in April.
It did not end here. Latham & Watkins’ refusal to provide a tax opinion to the deal ignited another round of arguments between the two companies. Energy Transfer’s law adviser said it cannot deliver the “721 Opinion” to the transaction, as it believes the exchange offer does not qualify as a “reorganization” that would free investors from tax liabilities. Latham said it had also received the same opinion from other tax advisory authorities.
In its 1Q earnings call, Mr. Warren emphasized that the deal could not be completed without the necessary tax opinion under Section 721 (a). According to news sources, he repeated around seven times that the merger could not be completed in its current form. Jefferies LLC analyst Chris Sighinolfi believes Energy Transfer’s recent comments during the earnings call have strengthened investors’ belief that the deal is unlikely to happen.
What if the Deal Fails?
Recently, the $34.6 billion tie-up between the world’s two biggest oilfield services providers, Halliburton Company (NYSE:HAL) and Baker Hughes ended. Increased pressure from regulatory authorities, including the US Department of Justice (DoJ) and the European Commission forced the two merger partners to call off the deal. The break-up has not only affected the future plans of both the companies, but also cost Halliburton around $3.5 billion.
The failure of the merger would cost each company billions of dollars. If Williams Companies backs out, it would have to compensate Energy Transfer with $1.48 billion. If Energy Transfer is the one to call it quits, it would not just have to face millions of dollars worth of lawsuits, but its reputation would also be hurt.
Energy Transfer has chased Williams Companies for months. In July, the company first made an unsolicited offer, which was rejected. In September, it approached Williams Companies with a new proposal. The offer had $6 billion in cash, which lured Williams Companies’ management to enter into the deal.
Certainly, after a yearlong chase and more than seven months under the merger agreement, if Energy Transfer withdraws from the deal, it would lose the confidence of investors and analysts. Mr. Sighinolfi also mentioned that the termination would not be good for Energy Transfer’s “reputation as a consolidator in the future.”
Finally, although the deal seems to be on the verge of breaking apart, the official deadline for the closing of the merger is June 28. The two companies still have time to work on the terms of the agreement to solve the tax issue. It now depends on the flexibility, and their willingness to finalize the deal as soon as possible.
NEW YORK (TheStreet) -- Shares of Williams Cos. (WMB) were climbing 6.6% to $27.78 on heavy trading volume mid-Thursday afternoon after the company reportedly rejected an offer by pipeline competitor Enterprise Products Partners (EPD), the Financial Times reports.
Enterprise remains interested in acquiring Williams Cos. despite the rebuff and may make another offer, sources told the Times.
Also, oil prices are advancing today to their highest level in six weeks on speculation of an upcoming output freeze, further boosting Williams Cos. stock.
OPEC countries are planning to meet next month at the International Energy Forum in Algeria, fueling reports they may resume talks of stalling output levels.
Many OPEC members have been hurt recently by the collapse in oil prices over the last two years, CNBC reports.
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Crude oil (WTI) climbed 3.18% to $48.28 while Brent crude advanced 2.31% to $51 per barrel.
Over 15.65 million shares of the Tulsa, OK-based energy infrastructure company have traded so far today, higher than the 30-day daily average of 12.15 million shares.
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