Williams Companies Stands Alone at the Altar
The Energy Transfer-Williams deal continues to be a rich source of intrigue and fascinating machinations. Sometimes a target company will try and get out of an agreement to sell itself so as to join with a more eager suitor. But it’s not often that an acquirer has second thoughts, and reading through a recent SEC filing by Energy Transfer reveals a blow-by-blow account of the frequent discussions of the William board as they considered their options.
As long ago as February 2014, Energy Transfer Equity (ETE) CEO Kelcy Warren had reached out to Williams Companies (WMB) CEO Alan Armstrong to discuss a combination. Armstrong was initially lukewarm and from the looks of it never became enthusiastic, even voting against the combination when it was finally considered by the WMB board in September 2015.
The “Background to the Merger” is in a section of a filing made, ironically, by Energy Transfer Corp (ETC), an entity created specifically to acquire WMB shares at closing but which for now is doing little more than posting SEC filings. Although ETC is currently controlled by ETE, its filing includes a methodical recital of the WMB board’s consideration of ETE’s offer as well as other competing proposals. Indeed, as the negotiations reached a conclusion WMB insisted on severely limiting ETE’s ability to walk away from the transaction. WMB sought to tighten the “material adverse effect” language that is commonly used and which allows a party to cancel a proposed transaction for no penalty in the event that a major surprise upsets the original economics. Kelcy Warren had pursued WMB for almost two years, and having finally succumbed to their eager paramour the WMB board was intent on making the deal stick.
Buyer’s remorse followed with indecent haste (see The Energy Transfer-Williams Poker Game). Within months ETE’s CFO Jamie Welch was reported to be privately lobbying WMB shareholders to press for modified deal terms, since the $6BN cash payment agreed to by ETE was weighing on the stock price. In fact, the performance of both stocks has been disastrous since the deal was announced, since the new ETC stock with which WMB investors would be paid was to be linked to collapsing ETE, thereby diminishing the value of the sale. It became obvious why ETE wanted out – less clear why WMB insisted on completing a transaction whose value had disintegrated. In May of 2015 ETE’s proposal to WMB had valued the stock at $64. By March of 2016 the prospect of the deal closing had dragged WMB down to $15. By then, Kelcy Warren had fired his CFO (who has sued) and gone nuclear in his efforts to get the deal changed or cancelled; ETE made a possibly illegal and certainly unethical move when they issued preferred equity only to insiders on preferential terms (thus devaluing the currency WMB investors would receive in the transaction, and drawing a WMB lawsuit). In case ETE’s distaste for the transaction wasn’t already clear, they subsequently posted an SEC filing slashing the originally expected $2BN in annual commercial synergies to only $170MM. For good measure they added that the combined company’s presence at WMB’s current headquarters in Tulsa, OK would be substantially reduced.
At this stage both stocks are attractively valued if they remain separate. So it’s interesting to learn how comparatively easy it is for the deal to be broken if the acquirer doesn’t wish to proceed. The merger-arb funds and the journalists who bet on a closing missed this. The New York Times reported on March 4th that, “…the company’s options appear to be severely limited.” With respect to breaking the deal, last week’s S-4 from Energy Transfer Corp noted that their tax counsel might not be able to deliver a needed tax opinion in time, a necessary condition for closing. One can imagine that if the acquirer doesn’t want to proceed, and an affirmative tax opinion is required from its legal counsel, it shouldn’t be difficult to delay or even fail to obtain such an opinion. Originally WMB didn’t want to be bought and ETE gave chase. Having finally been caught, WMB desires consummation while ETE claims its earlier passion has gone. WMB is at the altar while ETE nurses the mother of all hangovers in a hotel. Did they find each other on Match.com? In this upside-down world of love professed, only to be returned unrequited, it must be difficult for WMB to press a damages claim. Since the abovementioned filing cast further doubt on the deal WMB’s stock has risen. In any event, on June 28th either party can simply walk away. For Kelcy Warren that date probably can’t come quickly enough. The next target of his affections may run a little faster.
Crestwood Delevers and Soars
On Thursday Crestwood Equity Partners (CEQP) announced a joint venture with Con Edison which placed a 13X EBITDA multiple on the part of CEQP that was rolled into the JV and allowed them to use cash proceeds from the deal to reduce leverage. It was another example of public market equity prices underpricing the value that other energy sector investors assess to be present. Although CEQP jumped over 50%, we believe it’s still attractively priced with a 14% yield following a distribution cut, 1.6X distribution coverage and leverage dropping to <4X by year end. We noted the potential value in CEQP in February (see The Math of a Distribution-Financed Buyback)
Meanwhile, MLPs have since February kicked off the casket lid and leapt up, showing vigorous signs of life. Many formerly wealthy MLP investors who hung on are no doubt relieved to be restored from potential mobile home dwellers to at least the category of mass-affluent. Sell-side coverage of the sector is becoming more cautiously constructive, buoyed by the Alerian Index finally reaching positive territory year-to-date. We came across one amusing recommendation from a clearly overworked analyst whose bosses evidently decided to issue an emergency research piece initiating coverage on MLPs. The hapless analyst breathlessly rates Columbia Pipeline (CPGX) “Market Perform”, failing to consider TransCanada’s (TRP) recently agreed acquisition of CPGX for $25.50 in an all cash deal. So regardless of how the market performs CPGX is going to $25.50. The same analyst thinks WMB investors will suffer a 50% dividend cut if the merger with Energy Transfer goes through, overlooking the 1.5274X ETE exchange ratio they’ll receive for their WMB shares. Who says sell-side research isn’t worth reading?
We are long CEQP, ETE and WMB in our mutual fund and separately managed accounts.
Chart source: Yahoo Finance