The MLP industry usually isn't known for high-stakes drama, but Energy Transfer Equity's (ETE +1.89%) $53 billion attempted buyout of Williams Companies (WMB +2.00%) is taking an interesting and unusual turn -- one that could have massive ramifications for all investors involved.
Energy Transfer is potentially ready to launch a hostile takeover bid
Bloomberg Business is reporting that Energy Transfer Equity's Chairman Kelcy Warren is balking at a request by Williams that any potential acquirer agree to a "standstill" clause -- which would prevent it from buying Williams shares or lobbying its investors -- as a condition to look at its books.
Energy Transfer was none too pleased that Williams made public its offer, which the two companies had been negotiating in secret for six months. According to Bloomberg, as soon as Williams Companies rejected the $64/share bid -- which valued Williams at a 32.4% premium to its June 19 share price -- it began shopping itself to other potential buyers.
In fact, Williams has now approached 15 potential acquirers -- two of which were interested enough to agree to the "standstill" clause -- in an effort to garner a higher buyout price.
On Tuesday, July 7 Energy Transfer announced that while it prefers its acquisition of Williams proceed on friendly terms -- it's offered Williams unfettered access to its books with no strings attached -- it remains fully committed to "taking the necessary steps to implement the proposed transaction with Williams (including soliciting against the Williams and Williams Partners L.P. (NYSE: WPZ) merger)."
In other words, Energy Transfer is willing to try to buy Williams even if it has to launch a hostile takeover, something that has become increasingly rare in the MLP industry over the last decade. Let's take a look at why Energy Transfer is so eager to snap up Williams Companies, and more importantly, whether or not the deal actually benefits long-term investors.
What's at stake for Energy Transfer Equity
Energy Transfer wants Williams because the combined company would become the world's fifth largest energy company by enterprise value and dominate America's natural gas and oil pipeline industry.
Source: Energy Transfer Equity investor presentation.
As this map shows, most of Energy Transfer's existing pipelines are concentrated in the South and Midwest, while Williams has a strong presence in the West, South, and North East. Analysts expect the relatively small amount of overlap between the two company's existing pipeline systems would help it gain regulatory approval.
However, Energy Transfer wants to add Williams to its assets for a more important reason than merely an ego-stroking exercise in empire building -- it's also because Energy Transfer Equity's business model is based on collecting incentive distribution rights, or IDR fees, from its assorted MLPs.
Source: Energy Transfer Equity investor presentation.
As you can see, by merging with Williams, Energy Transfer Equity would grow the amount of cash received from its MLPs by 120%, greatly increasing the chances that it can achieve analysts' projected five-year dividend growth estimates of 24% CAGR.
Such impressive dividend growth, when combined with an already generous 3.1% yield, might help Energy Transfer Equity outdo its impressive historic market-thumping performance.
ETE Dividend data by YCharts.
What this means for Williams investors
Williams Companies rejected Energy Transfer's offer on the basis that it undervalued its shares, an argument that is hard to justify given the extremely generous premium the $64/share bid represents.
In fact, on an enterprise value/EBITDA basis, Williams is arguably being offered an absurdly high price for its shares -- meaning management may be foolish to expect anyone else to make a higher offer.
| Company/MLP | EV/EBITDA |
| Williams Companies | 28.0 |
| Energy Transfer Equity | 14.3 |
| Kinder Morgan | 19.3 |
| Magellan Midstream Partners | 19.3 |
Source: Yahoo! Finance.
Another thing to consider is that Williams Companies' management, while obligated to try to protect the best interest of its shareholders, also needs to look out for unit holders of its MLP Williams Partners.
Should Williams Companies be unable to obtain a higher bid for its shares, and Energy Transfer fail in its hostile takeover attempt, then Williams' original plan to buyout its MLP will go ahead, potentially triggering a large taxable event for Williams Partners investors that could greatly reduce the net benefit of the 14.5% premium they are set to receive for their units.
Bottom line: Energy Transfer's hostile takeover would be great for Williams investors
If Energy Transfer succeeds in eventually adding Williams Companies to its growing energy empire, investors in both companies should come out as winners because of a high, sustainable yield and years of strong dividend growth prospects ahead. In addition, investors in Williams Partners would avoid a potentially painful tax hit and gain a general partner whose colossal scale and industry expertise might still help boost distribution growth in the future.
