Natural gas pipeline giant Williams Companies (NYSE:WMB) announced today that it agreed to acquire the rest of its master limited partnership (MLP), Williams Partners (NYSE:WPZ), that it didn't already own in a $10.5 billion deal. Not to be outdone, Canadian energy infrastructure giant Enbridge (NYSE:ENB) made an offer to acquire its namesake MLP, Enbridge Energy Partners (NYSE:EEP), along with the rest of its publicly traded entities, including Spectra Energy Partners (NYSE:SEP). These transactions have big implications not only for investors in these entities, but for those who own other pipeline companies, too.
Details on the deals
Williams Companies agreed to acquire the 26% of Williams Partners that it doesn't hold in a stock-for-unit transaction. Under the terms of the deal, investors in Williams Partners will receive 1.494 shares of Williams Companies for each unit they own, which represents a 6.4% premium to yesterday's closing price. The transaction, which Williams hinted was in the works, will simplify its organizational structure, improve its credit profile, and increase dividend coverage, making the company's 5%-yielding payout even more sustainable.
Enbridge, meanwhile, offered to buy all its sponsored vehicles, which include MLPs Enbridge Energy Partners and Spectra Energy Partners, as well as Enbridge Energy Management (NYSE:EEQ) and Enbridge Income Fund Holdings (TSX:ENF). Under the terms of this megadeal, the company would swap its shares for the equity of these various entities at a ratio equivalent to yesterday's closing price, implying no merger premium. Overall, Enbridge would issue 272 million new shares valued at 11.4 billion Canadian dollars ($8.9 billion). This proposed transaction would simplify Enbridge's structure, improve its credit profile, and increase retained cash flow to fund growth. The deal would help support Enbridge's strategic plan to grow its 6.4%-yielding dividend at a 10% annual rate through 2020.
What's driving these mergers
While several factors served as catalysts for these deals, the main one is a policy change by the Federal Energy Regulatory Commission (FERC) that will have a significant impact on MLPs going forward. In March, FERC revised a long-standing ruling that allowed MLPs to collect income taxes on top of the rates they charged shippers on certain pipelines after a court ruling found that FERC "failed to demonstrate there was no double recovery of income tax costs." That rule change hit MLPs operating these pipelines hard, including Enbridge Energy Partners, which expected a $125 million hit to its revenue this year. However, since both Enbridge and Williams are corporations, they can retain the income tax allowance on those pipelines by acquiring their MLPs.
Enbridge noted that the FERC ruling and subsequent "market reactions across the MLP landscape" had "challenged the stand-alone viability of Spectra Energy Partners, Enbridge Energy Partners, and Enbridge Energy Management as reliable and cost-effective sources of capital to support Enbridge's growth." Because of that, the company could no longer drop down assets into those entities and raise cash to finance growth. The company also noted that Enbridge Income Fund had "lost its cost of capital advantage and is no longer an effective funding vehicle." Thus, it made sense to bring all these vehicles back in-house and create one stronger company.
There are more deals in the pipeline
These transactions will likely spur others to follow suit. Energy Transfer Equity has already made it clear that it will merge with its MLP Energy Transfer Partners as soon as it gets the green light from credit rating agencies that the combined entity can maintain an investment-grade credit rating. Meanwhile, TransCanada warned that its MLP, TC Pipelines, isn't a viable funding vehicle in light of the FERC ruling. Because of that, TransCanada might follow Enbridge and Williams in rolling up its MLP.
However, given the distressed nature of these MLPs, it's unlikely that investors will receive much, if any, merger premium. So there's no sense in buying them in hopes of earning a quick return. Instead, investors need to take the long-term view and consider companies like Williams and Enbridge, which are becoming much stronger, more sustainable dividend-growth stories with the buyouts of their MLPs.