A Fracking Good Deal for Williams Gone Too Far

On the back of a nearly 25% gain following the (NYSE: WMB  ) proposed deal to acquire parts of Access Midstream Partners L.P. (NYSE: ACMP  ) it doesn't already own and merge them with Williams Partners L.P. (NYSE: WPZ  ) , Williams Companies  (NYSE: WMB  ) investors have to wonder if the deal was really that good.

The deal is naturally interesting in that it provides Williams with access to the rapidly growing infrastructure needs in most of the primary shale plays. On the back of the deal, Williams proposes increasing the third quarter dividend by an astonishing 32% to an annualized rate of $2.24, providing the impetus for the stock gains. The company quickly rushed out to sell stock to pay for the deal, further suggesting that its stock rose too fast.

Merger plan
The first part of the plan is for Williams to purchase the 50% general partner interest in Access Midstream that it doesn't already own, along with 55.1 million units in Access Midstream Partners L.P. The deal with Global Infrastructure Partners II for $6 billion will increase Williams' ownership to 100% of the GP and 50% of the LP after the acquisition. The second part of the deal is to merge Access Midstream Partners L.P. with Williams Partners L.P., but this isn't guaranteed at this point.

Williams proposes a merger exchange ratio of 0.85 Access Midstream Partners units for each Williams Partners unit. For its part, Access Midstream's management released a statement saying it would review the proposal and do what was in the best interest of its unitholders. Both companies' stocks have fallen in the last few days, suggesting unhappy investors.

Creating a shale giant
Williams and Williams Partners were already creating a large shale infrastructure player with several large-scale projects to expand the transport of natural gas from the Marcellus Shale to both the Atlantic coast and back to the Gulf Coast. The deal with Access Midstream Partners will further expand access to gathering and transporting natural gas in the fast-growing shale plays.

Source: Williams merger presentation

Williams forecasts that distributions for the merged MLP will vastly exceed the previous Access Midstream guidance for 2015 and will come in substantially above 2014 levels. An interesting part of the deal is that due to the proposed combination of Williams Partners and Access Midstream, Williams Partners unitholders would actually have a lower expected cash distribution in 2015. The combined entity would have up to $5 billion in adjusted EBITDA in 2014, with roughly 73.5% of the total EBITDA attributable to Williams Partners.

Bottom line
The weakness in Access Midstream Partners' stock, especially compared to the nearly 25% gain of Williams, is suggestive that the market thinks that Williams is getting the better end of the deal. Clearly, the market has concerns about the increased distributions for Access Midstream Partners, probably centering more on whether the long-term growth is somewhat diluted by joining with the much larger Williams Partners. Williams also lowered forecasts for the year due to delays in getting the Geismar facility back into service along with higher construction costs and concerns about insurance payments.

With the quick sell of 55.1 million shares and the allotment for another 7.95 million shares, Williams is not a company worth rushing into at this level. The proposed merger of Access Midstream Partners and Williams Partners doesn't appear a certainty at the current valuation with neither investor group overly excited about the prospects based on the companies' stock reactions.

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