I was also worried that ETE might get forced into doing the deal. But since then, the court is leaning in ETE's favor. The prospect of them getting strong armed into the deal is a bit less likely. WMB still needs this deal more than ETE. If ETE manages to work its way out, it'll be a grand move for them.
ETE got greedy, perhaps, by trying to grow too big and time the markets. Their timing was off, to say the least. Now, whether what ETE has done is ethical - with relation to creating special securities that favors certain ETE shareholders and playing dumb when it comes to whether the deal will be tax free - is another story.
As Kelcy Warren, ETE founder, has famously said many times, "One cannot live on organic growth alone." However, it's become clear that a WMB buyout would not do anything for growth. The $2 billion in synergies number has disappeared as oil prices have fallen, and taking on $6 billion in debt to fund the cash component of the buyout seems imprudent at a time when balance sheet strength is becoming paramount.
The big questions are; is WMB a stock worth owning if no merger happens. And, despite the near tripling of ETE's stock price in just a few months, is there more upside if it wiggles its way out of the deal?
Legalities of it all
It is a "he said, she said" deal right now, as both claim the other has breached the merger agreement. The current court case the Delaware Court of Chancery is expected to be ruled on by Friday evening (just in time for the Monday WMB shareholder vote on the deal).
ETE's case is that it can't move forward with the deal as is, given the uncertainty of whether it'll be tax free. Now, the potential for the deal not being tax free is something ETE said it only realized six months after the merger was inked.
The lynchpin of the deal is that the agreement says ETE law firm Latham & Watkins has to give a tax opinion, but Latham says that it can't because it's unsure of whether the deal would be taxable or not.
ETE shares have now soared over the last few days as the vice chancellor overseeing the case said he doesn't care if Latham is right or wrong in withholding a tax opinion, but only that they are acting in good faith. In other words, it doesn't matter if ETE is actively trying to get out of the deal, just that Latham isn't helping them. In that light, it certainly seems as if things are leaning ETE's way.
WMB has also sued ETE over its creation of a special security to protect distributions for Warren and a handful of others if distributions have to be cut after the merger. For now, ETE refuses to cut its distributions, in part, because Warren collects some $200 million a year from the payments. That becomes irrelevant if ETE can wiggle out of the deal.
In the meantime, WMB could offer to restructure the deal, possibly doing away with the cash component and taking more stock. However, that $8 a share cash component to the deal is a big part of what got the deal initially approved by the board. So they may stick to their guns.
There are precedents as well, which is a silver lining for WMB. The Delaware courts forced Tyson to buy IBP in 2001, despite the argument that IBP had mislead them about their financials. The court also held up Hexion Speciality's agreement to buy Huntsman in 2007, ruling that a worsening financial position was not an adverse change.
Which stock to own? If the merger falls through, WMB will have to cut its dividend, plus there's the uncertainty with its large customer Chesapeake Energy (NYSE:CHK). The deal spread is large, with the WMB buyout offer now close to $30 a share, but still not worth the risk.
If ETE gets out of the deal, the upside could be to the $20s. I'd be more interested in ETE without WMB, and it appears that's where ETE is headed. Right now, it looks more like a winning scenario for ETE.
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.