Energy Transfer Equity’s Merger With Williams Is Crumbling
I continue to be amazed by just how bizarre the merger process between Energy Transfer Equity (NYSE:ETE) and Williams (NYSE:WMB) is unfolding. Publicly, both companies are all for it. Though, privately, both are trying to scuttle the deal by any means possible. Now, we get news that WMB is suing ETE over its preferred unit offering.
What is this lawsuit all about?
According to various reports, WMB is suing ETE to ensure “all ETE and Williams investors are treated fairly and equitably.”
WMB is arguing that ETE’s sale convertible preferred equity was not fair for its shareholders given that the sale was private and limited to only ETE insiders. WMB noted that the convertible units were just a way to protect the ETE insiders in case of a distribution cut. After all, preferred unit distributions must be paid before the common.
“With full knowledge that ETE may cut its distributions significantly, Mr. Warren designed the Special Offering to ensure that he personally will continue to receive cash distributions at current levels, while other investors in ETE may not,”
Indeed, with ETE needing to take out a $6 billion loan to fund the merger, there is a good chance that a distribution will happen after all is said and done. While the preferred unit offering saves ETE ~$518 million over 9 quarters from forgone dividends, the company would see its annual distributions jump to ~$2.2 billion post merger. ETE is in no capacity to raise equity and already has high leverage. The cash to pay down this added debt needs to come from somewhere and the most likely place is the distribution.
Meanwhile, WMB shareholders, who would be left with ETE-C shares, could face a significant loss if ETE lowers the distribution. After all, this is a sector where investors value income above all else.
Furthermore, ETE insiders are hardly losing out from much by giving up the dividends short-term. Instead, the units will reward common equity when the preferreds convert, regardless of what happens to the common distribution. How exactly is this a good thing for investors?
Conclusion: Williams is better off on its own
As a WMB shareholder, I want nothing to do with ETE. Besides the preferred unit mess, the rationale for the merger is already very weak. ETE drastically reduced the unexpected synergies, down to ~$170 million per year from $2.0 billion, resulting from the merger in a revised S-4 filing. In addition, the $6 billion in added debt could result in a credit rating downgrade as well as put at risk the distribution.
Frankly, WMB would be better off on its own than as part as ETE. Though, this depends largely on shareholders voting down the merger. Given all the recent drama, the odds of this happening have increased. Which I think is a positive.