On June 21, 2015 Williams Companies (NYSE: WMB) disclosed that it had turned down a $53 billion buyout offer from Energy Transfer Equity (NYSE: ETE) that would have valued Williams at a 32.4% premium to the previous trading day's closing price. We asked two of our energy contributors whether they thought this merger refusal was a smart move by Williams and is in the long-term best interest of shareholders.
Adam Galas: Ironically I recently wrote about why MLP mergers are usually a great thing for income investors, but in this case I agree with Williams' management that shareholders will be better off if Williams remains independent and proceeds with its buyout of Williams Partners (NYSE: WPZ).
The reason? Energy Transfer's argument that Williams investors will end up better off is largely based on the assumption that its stock -- which yields 3% versus Williams pre-buyout offer 5% -- will see substantially faster dividend growth than Williams' in the next few years; resulting in better long-term total returns.
In fact, Energy Transfer management even points to analyst dividend growth projections of 27% for 2015 through 2017 -- five year dividend growth estimates stand at 24% CAGR -- as evidence for this. Compared to Williams' dividend growth guidance of 10%-15% over the next five years it seems like a very compelling argument, but one that I am skeptical of for two main reasons: Williams' relatively larger growth project backlog and its stronger balance sheet.
|Company||Post Merger Enterprise Value||Approximate Project Backlog||Backlog/$1 Billion EV|
|Williams Companies||$84 Billion||$30 Billion||$357 million|
|Energy Transfer Equity||$185 Billion||$60 Billion||$324 million|
As this table shows, relative to its post merger size Williams Companies actually has a 10% larger project backlog. Since new projects are a key means of growing the dividend, I think expecting Energy Transfer Equity to grow its dividend twice as fast as Williams is a bit of a stretch.
That's especially true given the fact that Energy Transfer Equity has a much more levered balance sheet and less sustainable EBITDA/Dividend payout ratio.
|Company||2014 EBITDA/Dividend Payout Ratio||Debt/EBITDA|
|Energy Transfer Equity||1.5||7.1|
I just can't see how Energy Transfer Equity can so confidently predict that it can achieve significantly higher dividend growth than Williams over the next few years -- much less double it -- without risking a potential credit downgrade and the likely higher borrowing and costs of capital that could hurt future profitability.
Williams Companies' management's duty is to ensure that any buyout is truly in the long-term best interest of their shareholders. I think Energy Transfer's claim that their offer provides this for Williams' investors is based on some pretty optimistic and unrealistic dividend growth assumptions and so I support management's rejection of the offer.
Tyler Crowe: If you look at this deal, you have to look at all of the shareholders involved in the process, and one thing that sticks out here is that the proposed merger between Energy Transfer and Williams Companies is that it has some benefit to all investors, including those that own units of Williams Partners.
If the Williams Companies/Williams Partners buyout has some pretty beneficial things at the company level, but for individual investors of Williams Partners it doesn't look as sweet. Sure, they get a slight premium on their current units, but long term investors in the partnership will have to convert their MLP units to C-Corp shares, which will invoke the wrath of the tax man. However, if Williams Companies were to accept Energy Transfer's bid, it would allow Williams Partners to keep their shares as-is and avoid the immediate tax penalty of switching their holdings to a C-Corp.
For shareholders of Williams Companies, it may see a little decline in yield right now, but the offer represents a king's ransom for shares. At Energy Transfer's $64 a share offer, that values Williams' shares at an absurd TEV to EBITDA level compared to many of its peers.
|Energy Transfer Equity||18.1x|
According to Williams' EBITDA estimates based on its project backlog, it will take it until 2018 before its TEV/EBITDA was to come back in line with its peers at that price.
Energy Transfer has never had the most robust organic growth portfolio of projects, but it has consistently gone out and acquired other MLPs and grown its dividend through the incentive distribution rights it receives from those acquired companies. If Energy Transfer & Williams were to combine forces, it would tower over the rest of the industry and would likely have better access to credit that could lead to even larger deals.
Williams should do just fine as a stand-alone company. If all investors involved in this transaction want to look out for their own, though, they should hope that Williams' management realizes the benefits here and takes the deal.