After the week ended, a Delaware judge ruled that Energy Transfer Equity (NYSE:ETE) got the much sought after gift to walk away from the Williams Cos. (NYSE:WMB) merger. The merger has been very contentious so the companies walking away has been an expected outcome, with the only real question of whether termination fees were required by either party.
For its part, Williams keeps pressing forward for a deal that hedge funds want to close due to the large cash portion of the deal. The logic, though, continues to suggest that both companies are better off walking away from an integration and debt nightmare. The question now is whether investors want to get involved in Williams as the merger approaches termination?
According to the ruling by Vice Chancellor Sam Glascock III, ETE got lucky with the negative tax opinion. Williams claims the tax advisors of Latham & Watkins went out of their way to find a negative opinion for a top client.
Even the testimony of the head of tax at ETE has to be questioned considering the numerous statements claiming that CEO Kelcy Warren wanted out of the deal. Even the judge acknowledged this fact. Mr. Whitehurst made the following statement:
It's your worst nightmare. Your heart stops. You panic because that's that realization that you've got a major problem with your tax structure and it... could result in a significant tax liability.
The troubling part of this statement is that this wasn't the worst nightmare for ETE. In fact, wasn't this exactly what the CEO wanted? If this was the worst nightmare, ETE would pursue an alternative to make the deal work.
Regardless, the judge has ruled that even dishonesty doesn't change the facts that the tax opinion is valid. The end result is that ETE can terminate the transaction on June 28 without the required 721 Opinion.
Why Is Williams Still Fighting?
For its part, Williams continues to fight diligently and one must wonder why the company doesn't move on. ETE taking on at least $5 billion in debt still isn't prudent even in the improved energy markets. Working out a modified deal seems impossible considering ETE doesn't want to go down that path. Ultimately, though, the thesis involves Williams' shareholders obtaining ETC shares or synthetic ETE shares that could both collapse in a forced deal.
Sure, the company got 3 out of 4 proxy firms to provide a positive approval for the deal, but it appears that the move comes down to one key play by the hedge funds and Board Of Directors. The company made this key observation as to why Glass Lewis failed to provide the positive recommendation:
In failing to assess the value of consideration being offered to Williams stockholders in the transaction, Glass Lewis ignores the significant acquisition premium being offered to those stockholders. If Williams stockholders were to reinvest the cash consideration of $8.10 per share in ETE stock at the current ETE share price (as of June 17, 2016, Williams stockholders would own 74% of the combined company, significantly in excess of Williams' proportionate value contribution.
In essence, the big shareholders want to the collect the $6.0 billion in cash and use that money to purchase ETE shares on the cheap and possibly take control of the company. These funds want to become arbitrage traders and not investors.
ETE ended last week with a market value of $14.5 billion. If any forced deal sent the stock lower, one could see how large Williams shareholders might benefit from rushing in with a cash hoard to scoop up shares.
The other bizarre part of the discussion is the suggestion that a standalone Williams might need to eliminate or significantly reduce the dividend. Before the deal was approved, Williams proclaimed the ability to fund capital expenditures via asset sales and available resources. Now the tone appears altered on fears that shareholders might not approve the merger next week due to the high yield.
Worth noting, the current $2.56 dividend would offer a nearly 12.8% yield at the after-hours price of $20. Even a 50% cut to the dividend would place the yield at an exceptional 6.4%.
As an example, Spectra Energy (NYSE:SE) now trades with only a 4.7% yield. My previous research suggested a standalone Williams would fair much better than the dire situation proclaimed by a potential need to eliminate the dividend.
The key investor takeaway is that shareholders need to focus on the opportunity Williams provides as a standalone entity. ETE got approval to walk away and any future judgment that Williams could get in favor of the deal would have dire integration issues and financial implications.
The best bet is for investors on the sidelines to use any weakness next week to scoop up Williams on the cheap. The stock is down nearly 57% over the last year when Spectra Energy is nearly flat.
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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