Friday, we finally got the news that the Energy Transfer Equity (NYSE:ETE) and Williams Companies (NYSE:WMB) deal is off. ETE got the ruling it was looking for, with a Delaware court ruling that ETE will not have to go ahead with the WMB merger because its law firm Latham & Watkins cannot offer a tax opinion by the June 28th deadline. That means that ETE's advisors acted in good faith to issue an opinion on the transaction's tax consequences. As I mentioned last week, whether what ETE did is ethical is another question, where it was looking into various technicalities to help squash the deal.
It did get out of the WMB deal, which is the best case for its shareholders. The ends may justify the means in this case. As it turns out, much of the upside in ETE shares were already realized before Friday, but there should be more to come as ETE refocuses on its independent growth strategy and the strengthening of the balance sheet.
Now, part of the reason for a muted ETE stock reaction is that WMB is still determined to close the merger. WMB said last week, that it believes "ETE has breached the Merger Agreement by failing to cooperate and use necessary efforts to satisfy the conditions to closing, including delivery of Latham & Watkins LLP's Section 721(a) tax opinion." WMB says it remains committed to closing the merger.
Granted, WMB will likely appeal the court ruling, the deal will remain dead. The WMB vote on whether to move ahead with the merge was also today, with the merger being approved as 62% of shareholders elect to receive the offer in all cash, 3% say it would take just ETE stock and 3% wanted a stock/cash blend. But at the end of the day, that this vote has no meaning.
The fight to save WMB begins
Without the merger with ETE, WMB will likely have to cut its distribution and may go back to Williams Partners (NYSE:WPZ) for a merger. Distribution wise, WMB is yielding 13%, but it can't afford to keep that up. We'll likely see a hefty cut that puts its yield closer to 8%.
The activist investors will be at the gates on this one too. Corvex Management, which owns 5.5% of WMB, has its founder Keith Meister on the board. They were set to cash out at a nice premium before the plunge in oil prices. They're now underwater on their stake and will look to recover some of those damages. As well, Soroban Capital is also involved, where its founder Eric Mandelblatt has a board seat as well. Look for the two activists to help push WMB back toward WPZ, where WMB walked away from that deal for the superior ETE offer.
Without the overhang of this deal, ETE becomes an enticing way to play the energy space. It's set on not cutting its distribution, which stands at a 8.6% yield. Kelcy Warren, ETE CEO, has a vested interest in keeping the distribution alive as he collects a hefty distribution check - pulling in $200 million in distributions last year. The key will be improving its balance sheet, while resisting the urge to find new things to buy - where Warren is known for his growth via acquisitions strategy. Yet, the hope is that he learned his lesson, for now, with the WMB saga.
Disclosure: I am/we are long ETE.
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.