For investors in Williams Companies (NYSE:WMB), Friday was a bad day for a reason other than Brexit. A Delaware court ruled that Energy Transfer Equity (NYSE:ETE) will be able to get out of its deal to acquire Williams, due to concerns about how the deal will be taxed. This should substantially affect Williams shareholders as the deal was made when energy prices were much higher, and Williams wanted to force the deal in order to help maximize shareholder value. Without the deal, however, Williams will still be fine and has a few paths forward.
It is not a secret that Energy Transfer wanted out of the deal. When they made the merger agreement with Williams, energy prices were high and there was the projection for large synergies between both companies. Now with the substantial drop in prices, Energy Transfer is facing a cash crunch caused partially by the cash portion of the deal. Energy has offered previously to renegotiate the deal with Williams, as they were hoping that Williams shareholders would accept more stock compensation instead of cash. However, Williams has refused to budge. While a court usually doesn't allow a company to get out of a merger that it doesn't like, in this case there was a specific question before the court.
The agreement between Williams and Energy Transfer contained a provision that would essentially let Energy Transfer walk away from the deal if the tax structure on the deal was not what Energy thought that it would be. While this is usually a routine matter, Energy's counsel refused to issue a letter addressing the merger as tax free. As a result, Energy Transfer has cited the tax issue as the reason that it wants out of the deal.
The court ruled that Energy Transfer's lawyers were acting in good faith in their belief that the tax structure was not as initially thought tax free. While Williams leaned heavily on the argument that this is just a ploy by Energy's attorneys to help Energy Transfer get out of a deal that it now regrets, the court found the issue differently. While it may look suspicious, there is very little evidence that this is the case, and it does appear as though this is an issue where Energy Transfer's attorneys found a problem in the deal structure, and were acting in good faith. Williams is expected to continue to try to do everything that it can in order to help make the merger go through at its current terms.
The Fight Is Not Over
The first part for shareholders to remember is that this fight is not necessarily over. Williams has previously indicated that it intends to appeal any unfavorable ruling. I would expect Williams to do so, as if it is able to pull off a successful appeal, the stock should go up substantially. Williams will be expected to file an appeal. I would characterize it as unlikely that Williams will be successful in winning a reversal. It will be important, however, for Williams shareholders to follow through by voting in favor of the merger. It would put Williams in a precarious position if Williams wins the appeal, but the shareholders vote against the deal. It is unlikely that the appeal will succeed, but would not be entirely unprecedented.
Williams Options If Buyout Falls Apart
Williams will have a few options if the buyout with Energy Transfer falls apart. Williams could continue to operate as a company, which would be largely a bet on oil prices to rebound. The other option would be for Williams to try to go back to Enterprise and see if they will be able to work out some sort of new deal. If ETE is interested in acquiring Williams, this could still be a possibility, albeit at a much lower price. What would be interesting about the buyout option is that it could still create substantial value for Williams shareholders if they hold the stock and oil prices rebound.
Williams has taken the move of cutting 10 percent of its workforce. Williams is positioned through its use of fee based service arrangements, which makes it less susceptible to falling energy prices. Of course, if there is a problem collecting on the fees, or falling demand Williams is still affected by the energy crisis.
In terms of strategy, Williams it seems has been smart about how they are attacking the weaknesses within their market. Williams has been investing heavily in their Transco system, which runs to the Southeastern part of the United States. With a projected increase in the demand for natural gas in the Southeast over the next decade, this investment has the potential to pay off rather substantially. Williams other operations continue to be positive on an EBITDA level, and are still providing cash flow even with depressed energy prices.
For its most recent quarter, Williams reported a net loss. Should the deal not go through, Williams even without the breakup fee should have a substantial amount of cash with which it can ride out the downturn in energy prices. As of last quarter, Williams has $164 million in cash and cash equivalents. While the net losses may continue for a while, Williams has been making the strategic investments necessary in order to position itself well should it want to continue operating as an independent company.
While shareholders should expect losses on Monday, Williams as a company will be ok without Energy Transfer's buyout offer. In fact, prudent investors who want exposure to the potential upside in energy prices should consider investing in Williams. If energy prices continue to move up there could also be a benefit if Williams is able to restructure its debt at lower interest rates. One of the main things that has been killing Williams up to this point is its interest rate and the cost of maintaining its debt.
On the other side, Williams could still be a buyout target for Energy Transfer Partners. I would expect that Energy Transfer may come back with another offer for Williams. There are still a lot of synergies between the companies, and the addition of Williams' pipelines to Energy's should help to create a company that is well positioned for if energy prices increase. The main sticking point in the current deal is the cash component, which had Energy Transfer worried about the ability of the company to maintain its debt. Should Energy Transfer instead be able to swap most of this out for shares, there could still be a deal with Williams. Williams shareholders will have to decide if they are ok with receiving stock in exchange, given that Energy's stock has continued to drop from when the deal was originally announced.
The sky is not necessarily falling for Williams shareholders. While the court ruling is no doubt a blow to Williams, the underlying company is fine. Williams will have to decide what it wants to do should the deal fall apart, Williams will have the ability to either continue as a independent company, or there is a potential that Energy Transfer will come back to the table with another offer.
Additional disclosure: I am not a lawyer and this article should not be construed as offering legal advice or legal opinions. Please do your own due diligence before investing.
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.