What: Shares of Williams Companies Inc (NYSE:WMB) exploded higher Monday morning after news broke that the company rejected a $48 billion buyout offer from rival Energy Transfer Equity LP (NYSE:ET). While the proposed $64-a-share offer represented a 33% premium to Williams' closing price on Friday, the company said that the offer "significantly undervalues" the company and wouldn't deliver the value it expects to achieve on a stand-alone basis. That said, the offer is forcing the company to explore strategic alternatives, including a potential sale or merger. This suggests the company is open to a deal as long as it comes at a much higher price, which is why investors are bidding up the stock.
So what: Prior to the offer from Energy Transfer Equity, Williams had been pursuing a merger deal of its own, as it is in the process of acquiring all the units it didn't own of its MLP affiliate Williams Partners (NYSE: WPZ). It believes that the stock-for-unit deal will create significant long-term value for investors in both companies as it is expected to drive an industry-leading 10%-15% dividend growth rate through 2020.
However, Energy Transfer Equity's offer is contingent on Williams dropping its deal for Williams Partners. That appears to be one of the sticking points, as this is a deal Williams doesn't want to abandon, which is why it plans to continue to move forward with the merger while it explores strategic alternatives.
Now what: There's no certainty that Williams Companies will find any of the alternatives appealing. Furthermore, it might have a tough time finding a better offer, as not only is the premium very generous, but the price tag north of $50 billion leaves few available buyers. It very much appears that Williams would rather grow on its own than sell out to a rival. Because of this, investors should invest in Williams on its own merits and not on the prospects of a quick profit via a buyout deal that might never materialize.