In a surprise tone, Williams Cos. (NYSE:WMB) management actually sounds intent on forcing Energy Transfer Equity (NYSE:ETE) to complete the much maligned merger. The relationship has turned very acrimonious suggesting an integration of the two companies would be difficult and questioning the value it taking extraordinary steps to force the merger closure.
Regardless, the Williams connections recently interviewed by the Wall Street Journal all seemed to favor the deal due to the cash component despite logic that the share portion of the deal would surely collapse under the current structure. With the recently reported Q1 results, are Williams' shareholders better off not pursuing the merger?
The Q1 results were generally reported as negative in that Williams missed EPS estimates by a wide margin, but the reality is that the company grew adjusted EBITDA by a solid 15%. The flip side though is that interest expense and depreciation charges continue to rise, eating into the benefits of the EBITDA gains.
Importantly though, Williams Partners (NYSE:WPZ) had a dividend coverage ratio of 1.02x for Q1. The partnership only covered the cash distributions in one quarter in 2015.
Source: Williams' Q1 earnings release
The company implemented a 10% workforce reduction during Q1 that amounts to cutting 690 positions. The estimate is that the annual benefit is $100 million or roughly $25 million in quarterly cost savings that will contribute to the dividend coverage going forward.
Investors need to keep in mind that Williams and Williams Partners are doing an incredible job of covering the dividend in this difficult time. Right now Williams' pays a 13.2% dividend yield and Williams Partners sits at 11.3%.
Based on all of the statements from ETE CEO Kelcy Warren, the company is desperate to restructure the deal. The convertible offering that the CFO objected to at the cost of his job and the recent tax issues are all attempts at negotiating leverage by ETE.
The CEO even said as much on the recent earnings call that the deal was dead without a restructure:
...absent of a substantial restructuring of this transaction, which Energy Transfer has been very willing and actually desiring to do, absent that, we don't have a deal.
The problem though is that Williams' executives apparently have no inclination to restructure and the deal is apparently iron clad. The unknown part of the equation is what exactly Kelcy Warren means by "restructuring".
The deal involves 1.5274 units of the newly created junior Energy Transfer Corp (ETC) shares plus $8 in cash. The real attractive part of the deal is the $8 in cash and technically a total deal value of $27.90. One has to wonder if ETE isn't wanting to restructure the deal based on the current market economics where as Williams rightfully wants the valuation based on the original deal.
The prime reason that investors won't see that valuation metric is that the cash portion of the deal requires $6 billion in cumbersome debt and the ETC shares given to Williams will see a substantial valuation discount.
One has to assume that Williams' executives are playing hard ball with ETE in order to obtain a more favorable deal or a fee for ETE walking away from the deal. The company filed suit in Delaware to prevent ETE from walking away from the deal.
While Williams might rightfully have the ability to enforce the merger agreement, the company appears far off on the ability of the deal to deliver benefits to shareholders. No stats exist, but the companies involved in a heated merger battle probably don't provide rewards to shareholders unless the deal involves mostly cash to the shareholders of the acquired firm.
At this point, the clear preferred investment is directly in Williams or Williams Partners with some sweetener from ETE to go away. The stock is very attractive as the company has growth projects, cost reductions, and improving market conditions that might sustain the dividend at an extremely high level. What shareholders don't want is a completion of this merger and a position in a junior security like ETC.
The recent stock action supports that Williams' stock is being held back by the BOD pursuing the merger via litigation. The recommendation is to own the stock knowing that a rally will take place on termination of the deal with the potential for more upside from a negotiated settlement from ETE.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WMB over 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.
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