Energy Transfer Equity Wants Out Of The Williams Merger – Seeking Alpha

What a crazy day for Energy Transfer Equity (NYSE:ETE) and Williams (NYSE:WMB) as well as their MLPs Energy Transfer Partners (NYSE:ETP) and Williams Partners (NYSE:WPZ). Both stocks saw massive volatility after the New York Times reported that ETE was “frantically searching for a way to pull out of the deal”. ETE and WMB agreed to a $ 38 billion merger back in 2015 after a long auction process which started after an unsolicited bid by ETE. This news was big enough to even trigger the circuit breakers, as shown below. This article will discuss some of the possible ramification of this news turns out to be correct.

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ETE wants out

According to the article, ETE is suffering from buyer’s remorse. The stock has seen it share price decline over 60% since the announcement, largely as a result of the massive decline in oil and natural gas prices. Given that it was being acquired, shares of WMB closely followed ETE’s decline.

ETE data by YCharts

Furthermore, there is the issue of the $ 6 billion in cash that ETE agreed to pay to WMB shareholders. This cash component was the sweetener that allowed ETE to finally land WMB after its initial unsolicited offer was rejected.

Though, given just how pessimistic the market has become for energy, ETE will have a hard time raising this much cash. Any debt would carry a sky-high interest rates and there are not much buyers out there for assets. The company did secure a short-term one-year bridge loan, but it will eventually need to find a long-term financing option.

There has even been talk of ETE lowering or suspending its distribution after the merger’s completion, to pay down the added debt, a far cry from the expected 25% distribution growth target initially promised.

Keep in mind that ETE’s CFO Jamie Welch left the company suddenly a few weeks back. As I noted in a recent article, given that the CFO help structure the revised deal, which included the cash component, his departure was a clear sign that the merger was likely not getting done.

In addition, there is some concern regarding WMB’s exposure to Chesapeake Energy (NYSE:CHK), which has been facing a liquidity crisis and bankruptcy fears, and which also happens to be WMB’s biggest customer.

Can ETE get out of the deal?

The NYT article cited experts that noted that ETE does not have much leeway in axing the deal itself, short of filing for bankruptcy.

There is the possibility of WMB shareholders voting against the merger. In addition, government regulators may not approve the merger. Though, both these scenarios seem unlikely.

However, according to the NYT article, ETE was apparently desperate enough to offer WMB a massive breakup fee, even though the merger agreement does not call for one:

In recent weeks, the company considered, but never presented, an offer of a one-time payment more than $ 2 billion to Williams to walk away, according to two individuals with knowledge of the discussions who spoke on condition of anonymity because of nondisclosure agreements.

Conclusion

Despite the rumors and stock price action, both ETE and WMB remain committed to closing the merger, at least publicly. WMB noted in its earning release that it was committed to completing the transaction “as expeditiously as possible”, while ETE even suggested a closing date as early as Q1 or Q2 2016. Though, I have a feeling these are merely a face-saving measures. The market is screaming that this merger is not going to happen.

Frankly, as a WMB shareholder, I would be very happy if this deal gets nixed. WMB is no longer trading based on its fundamentals and is being held hostage by this looming merger, more or less acting as a ETE proxy. WMB shareholders have suffered from Kelcy Warren’s ambition long enough.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am/we are long WMB.

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.