Energy company Williams (NYSE:WMB) announced today a $6 billion deal to boost its stake in Access Midstream Partners (UNKNOWN:ACMP.DL). The company sees this as the first step to merging Access Midstream Partners into its own Williams Partners (NYSE:WPZ) master limited partnership to create a $100 billion energy giant and one of the largest MLPs by enterprise value.
Drilling down into the deal
Williams is paying $5.99 billion to acquire the 50% stake in Access Midstream Partners' general partner (its controlling entity) that it doesn't already own. Williams will also acquire 55.1 million units of Access Midstream Partners. In total, the deal will see Williams assume full control over Access Midstream Partners' general partner and 50% of the company's common units.
The planned unit-for-unit merger of Access and Williams Partners would create a natural-gas gathering, processing, and transportation powerhouse. Access Midstream Partners is the largest gathering and processing MLP in the country, while Williams Partners delivers 14% of the natural gas consumed in the U.S. each day. Combining the two would establish a major force within the midstream industry, with assets literally spread throughout North America.
Building shale scale
For Williams, the deal is really about growing its scale in North America's shale plays. The deal would push Williams Partners into the No. 1 or No. 2 position in each of the major shale plays where it operates. Having that scale is an important competitive advantage as its customers will turn to Williams first when the need for a new midstream solution arises. That provides the company with built-in growth opportunity to build out and maximize the returns of the position it has in these markets.
The other important aspect of increasing its scale is the financial synergies that will cut costs. For example, Williams expects the deal to improve the credit ratings at Access Midstream, which lowers its cost of capital and improves returns. Furthermore, as a focused company it can become much more efficient in allocating capital to pursue high-return growth projects. Lastly, as a larger entity it can pursue larger projects or subsequent mergers that might have been out of reach before, but which could move the needle.
Williams is taking a big first step to creating a giant in the midstream sector. Once complete, the company's enterprise value will balloon to about $100 billion, which would rival some of the more well-known MLPs in the sector. Williams will then become a new option for investors seeking a core MLP holding.