Williams: Pick Up The Pieces Later

| About: Williams Companies (WMB)

Summary

The Williams and ETE merger continues on the perplexing path to self destruction, though both companies want the other company to blink first.

The latest filing by ETE provides no commercial reason for the merger to go forward.

The recommendation is to continue watching from the sidelines as too many questions abound regarding termination fees for an investment.

The best part about the stock market is that investors don't have to participate. Sometimes watching from the sidelines and waiting for a deal to self destruct leads to the best opportunities.

Source: Williams Click to enlarge

My recommendations for months now and as recently as this article last month was to wait for the Energy Transfer Equity (NYSE:ETE) deal to purchase Williams Cos. (NYSE:WMB) and its ownership position in Williams Partners L.P. (NYSE:WPZ) to unravel before picking up the pieces left over. Williams never seemed to want the deal and ETE keeps making moves to escape the deal.

Only a couple of weeks ago, ETE completed a private offering of convertible shares that seemed to bypass the non-consent of the BOD of Williams. Now ETE is slashing the benefits of the merger and granting long-term incentives that will again harm the position of Williams' shareholders.

The updated S-4/A filing had the following recent developments:

  • The commercial synergies for the deal reduced from $2 billion to approximately only $170 million in EBITDA by 2020.
  • ETE plans to grant awards under a long-term incentive plan that will dilute Williams' position in the new Energy Transfer Corp. from 81% to only 74%.
  • The new entity will need to consolidate headquarters in Dallas causing significant layoffs in Tulsa and Oklahoma City where Williams operates.

The updated commercial synergy amount is mind blowing considering the deal requires $6.05 billion in new debt. The interest expense on the new debt alone could far surpass the commercial synergies at these levels.

What the company doesn't address are any benefits of the typical operational synergies that come along with a merger where the duplicate operational units are eliminated. ETE alluded to this via the suggested gutting of the Oklahoma offices of Williams. The unknown are the financial benefits of cutting these staff members and whether that is enough to justify going forward with the merger.

The other moves are again perplexing in that ETE wants to cut some personnel while awarding others. The energy sector is in such turmoil that retaining employees shouldn't require a large incentive plan with no other employment options available in the industry. Senior management members aren't likely to leave the industry

The news seems to hint that ETE wants Williams' shareholders to vote the deal down. The bizarre part of the termination fee is that the Williams' BOD isn't allowed to change their recommendation for the merger without causing the payment of the $1.48 billion termination fee to ETE. Not to mention, the details suggest that the termination of the merger due to not getting shareholder approval will trigger the fee as well.

Click to enlarge

Source: ETE S-4/A filing

For its part, Williams' BOD continues to recommend the merger for the above reason. The deal is still better for shareholders than to fork over a $1.5 billion termination fee for a company that now only has a $11.5 billion market cap.

At this point, one has to assume that Williams' shareholders don't want the ETC shares once the deal closes that are secondary to ETE shares. The only possible out is to derive that ETE violated the terms of the merger by completing the convertible offering without obtaining the consent of Williams or a substantial change to the merger agreement via the potential closing of the headquarters in Tulsa. Local Tulsa leaders, including the Chamber of Commerce and the Mayor, are already angling for Williams to pursue this course of action.

The key takeaway is that the current situation is akin to gambling. Too many questions abound regarding financing of loans and shareholder approvals that could evoke large termination fees. The recommendation remains to watch from the sidelines with the possibility of picking up the pieces if the merger dissolves.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.