Williams Companies: A Dividend Cut And A Proxy Battle

| About: Williams Companies (WMB)

Summary

Usually insurgents such as Corvex Management L.P. are attracted by extreme undervaluation and see very large potential gains.

The sale of the Canadian properties may lead to a lower cost corporate structure. The Canadian properties were the last significant profit center that was not completely partnership owned.

The dividend reduction was due to a need to improve the capital structure to meet tightened lending conditions for the partnership.

Win or lose, the proxy battle will most likely result in capital appreciation sooner rather than later. Management needs to unlock the value of the company to defeat the insurgents.

The stock of the company may lose its suitability for income investors as the investment changes to a special situation or a capital appreciation play.

Managements everywhere always tell investors that their stock is undervalued.

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Source: Williams Companies August, 2016, Investor Presentation

This is a fairly common presentation for the undervaluation pitch. This is right at the point where investors fall asleep or give up hope that things will ever change. In many of these companies management seems entrenched forever.

But then along comes Corvex Management LP to liven up the meeting. Corvex has nominated 10 employees to contest for board seats on the Williams Companies (NYSE:WMB) board of directors. Chances are very good that Corvex sees more than a 10% or 20% undervaluation to spend the money and time to launch a proxy battle. Especially when the possibility of failure is factored in on top of the expense and time part, public investors can bet a fairly sophisticated investor sees a chance for a large percentage profit opportunity. So investors may get the chance to vote for a change or the same old business. This time there should be no room for complaints about nothing changing.

Investors may remember when Dr. Hammer, who headed Occidental Petroleum (NYSE:OXY) died and there was a peaceful transition to the new chairman, who promptly cut the dividend. The company then began a remarkable period of growth and profitability that few would have predicted. So that while the company now faces new profitability challenges, the point is the management change at the time of Dr. Hammers death definitely turned out to be positive.

More acrimonious was the battle between Saul Steinberg and the Bass Brothers for a significant stake in Disney (NYSE:DIS). At the time, the founder had been dead for a few years and the company appeared rudderless. A few business classes, when asked about the effects of the Bass Brothers eventual control of Disney, stated unanimously that the Bass Brothers would ruin a good company. While that was a very unscientific poll, it represented a part of the market opinion at the time. However, the Bass Brothers quickly sent Disney on a growth path that returned them many times their investment before they sold significant amounts of their stake in the company. So this battle also produced gains for shareholders.

However, management usually has an advantage in a proxy battle. Large numbers of shareholders usually check the boxes management recommends whether they investigate the issues on which the battle lines are drawn or not. Even a fair amount of institutional investors will back management regardless. Change is scary, and a fair number of investors for varied reasons will not vote for change. So in order to mount a successful proxy battle, the insurgents need an extremely compelling case. Insurgents need to attract a large margin of the shareholders that are willing to listen to their position in order to win. Shareholders need to very carefully listen to both sides before making a decision that could very significantly impact the future of the company. At this point, both sides agree, the company is undervalued, the question is as to the extent of the undervaluation, and the means needed to achieve the proper valuation.

With the announced sale of the Canadian properties (an ownership that the partnership also had a significant interest in) the last really significant division of the Williams Companies that does not belong to the partnership is gone. So after the sale there may be a structure simplification issue to cut costs permanently or an explanation as to why the current structure is still needed. Depending upon future goals and objectives, the current structure could again be needed.

The company's financial strength is usually a notch or two below the financial strength of the partnership. So usually Williams Companies is not rated as an investment grade company. However, it is also pretty far from going bankrupt. However, both the company and its subsidiary have been borrowing money from the bank line until now. This is going to change in the future because of the new lending environment. So the announced decrease in the dividend will allow more income (cash flow) to be retained by the parent company to be used to strengthen the partnership through the purchase of more units. This decrease is not due to a deterioration in the business of the partnership. It is due to the need to raise more capital as the tightened lending requirements take effect industry wide so the company can maintain its expansion goals.

The appointment of three independent directors to the board of Williams Companies will have very little effect on the coming proxy battle UNLESS the company shows very significant progress towards removing the perceived undervaluation in the future. The proxy battle is for one reason: to make money. Anything short of making a sufficient profit will result in a proxy battle. So for Corvex, the independent directors are probably a non-issue.

The Chesapeake (NYSE:CHK) issue appears to have been resolved in a way that is very favorable to the partnership and its parent. Even had the worst happened and Chesapeake had gone bankrupt, the contract probably would have been re-negotiated in bankruptcy court. That would have reduced the profitability of the contract, but it would probably have not gone away, and Williams Partners L.P. may well have received preference to being paid while the company was reorganizing. Williams Partners L.P. (NYSE:WPZ) now has an excellent chance to service the new operator of the properties that Chesapeake sold and the new operator will probably be in better financial shape also.

The proxy battle has raised the odds of a significant capital appreciation sooner rather than later. Even if the insurgents lose, the chances are that management will have to move towards unlocking the value of the company to defeat them. Management has already touted the increase in stock price, but will have to keep that stock price moving upward. The threat of more proxy fights and other take over maneuvers will be too great. Usually these type of things do not happen by themselves, once and done.

The company was once primarily an income vehicle based upon the income from the pipeline management and the pipeline ownership. But the "income Priority" fees that Williams Companies receives from the Williams Partners L.P., even when the pipeline does not report profits may mean that management is being paid to be complacent. It bolsters the argument of the insurgents that it is time for a board change, although there is still more investigation to do before there is a final decision. As the annual meeting nears, this stock could become a special situation, or capital appreciation play. In the meantime, that chances of losing money on an investment in Williams Company are reduced dramatically.

Disclaimer: I am not an investment advisor and this article is not an investment recommendation. Investors are urged to read all of the company's filings and press releases to determine for themselves if this company fits their investment profile.

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.