Enterprise Products Partners (NYSE:EPD) was hoping to quietly swoop in and win over Williams Companies (NYSE:WMB) after Williams' merger with Energy Transfer Equity (NYSE:ET) imploded. However, news quickly leaked of its interest, which drove Williams' stock higher and led to questions by Enterprises' investors. As a result of the news leaks, and the lack of engagement from Williams, Enterprise Products Partners decided to pull its proposal.
How another deal unraveled so quickly
Reports about Enterprise Products Partners' interest initially surfaced in mid-August, claiming the company approached Williams shortly after the termination of its merger agreement with Energy Transfer Equity in June. It was an opportunistic approach, with Enterprise hoping to take advantage of Williams' depressed stock price and board upheaval to acquire its rival. That said, Williams did not officially respond to either of Enterprise's offers.
Because of that lack of engagement, Enterprise announced last night that it "has withdrawn its indication of interest in The Williams Companies, Inc. regarding the possible combination of Enterprise and Williams." It further noted that it "determined that there is no actionable path forward toward an agreement."
Williams, however, countered with a press release commenting on Enterprise's decision to walk away. It wrote:
As Williams recently communicated to Enterprise, the Williams Board, including the three new directors, with the assistance of legal and financial advisors, was engaged in the process of carefully reviewing the most recent indication of interest from Enterprise. As such, Williams is surprised by today's announcement from Enterprise. As always, the Board remains open to considering any potential strategic alternative that would maximize value for stockholders.
Williams' seems to imply it was open to a deal, which suggests there might have been more at play than either company is saying publicly. That said, it appears there is no chance Enterprise will reengage given what has transpired over the past several weeks.
Blame it on the press or questionable economics?
One thing Enterprise made clear was that it did not like the fact that its interest became public knowledge. It specifically cited that "recent news leaks" and "rumors with respect to our proposals" were as much to blame as Williams' lack of engagement. That said, it likely wasn't the news leaks themselves that turned off Enterprise's interest, but the questions that arose from investors as a result of those news leaks. In particular, the questionable economics of the deal.
First of all, one of the things that set Enterprise apart from its peers is its strong balance sheet, with the company boasting one of the highest credit ratings among MLPs, at Baa1/BBB+. Williams, on the other hand, has a much weaker credit rating of Ba1/BB, which is below investment grade. Meanwhile, the credit rating of Williams' MLP, Williams Partners (NYSE: WPZ), is on the bottom rung of investment grade. Because of that, there is a real risk that merging with Williams could have had an adverse impact on Enterprise's credit rating -- therefore increasing its borrowing costs. That could have hurt the company, because Enterprise's credit rating is a distinct competitive advantage over rivals. For example, earlier this year, Enterprise issued $575 million of 10-year debt at 3.95%, while Williams Partners issued $1 billion of 10-year debt at 7.85%. Those higher interest payments cut into the cash flow Williams earns on expansion projects. The concern here is that the deal could have a negative impact on Enterprise's ability to expand in the future should it cause its costs of capital to increase.
Meanwhile, Enterprise reportedly made two all-stock offers for Williams, implying that it raised its initial bid, with one source saying the deal carried a premium of less than 10%. It likely did not have a choice given that Williams' stock price is up 27% since Energy Transfer Partners terminated the merger, and 16% since news leaked of Enterprise's interest. Because of that rising stock price, Enterprise would have likely needed to raise its offer again, which would probably make the transaction much less economically compelling for its investors.
Enterprise Products Partners' decision to walk away from its opportunistic attempt to acquire Williams Companies appears to be the right choice. The deal had the potential to impact its credit negatively, and it was getting costly as Williams' stock price rallied. That leaves both companies looking elsewhere for future growth, with Williams turning inward, while Enterprise will likely be on the lookout for more amenable M&A partners.