The drama of Energy Transfer Equity's (NYSE: ETE) $53 billion buyout attempt of Williams Companies (NYSE: WMB) just keeps getting more interesting.
After Williams rejected Energy Transfer's offer on June 21, shares of Williams soared 26%. However, they soon dipped, both as a result of Energy Transfer announcing a potential hostile takeover of Williams -- which may have spooked investors as to whether or not the deal will be completed -- as well as oil prices crashing to 6.5-year lows.
Yet as the chart above clearly shows, Williams has rallied strongly in recent weeks on news pertaining to merger talks. Let's explore what the future of Williams may hold, but more importantly, what long-term investors in Williams Companies and its MLP, Williams Partners (NYSE: WPZ), should consider doing while we wait for this drama to play out.
Hostile takeover off the table
On July 17, Energy Transfer announced that it was signing Williams' confidentiality agreement that includes a "standstill" clause, which basically means it is forgoing a hostile takeover in favor of bidding for Williams against several other potential buyers.
Then, on August 5, news broke that Energy Transfer had made it to the second round of bidding, which has sent Williams shares rallying ever since due to increased investor optimism about the deal -- which values Williams at $64 per share.
New bidder steps to the plate
According to Reuters, on August 14, Spectra Energy Corp (NYSE: SE) -- whose market cap is half that of Williams Companies -- officially announced it was bidding to buy all of Williams' assets for as-yet undisclosed terms.
Spectra joins a slew of other big pipeline names, including Kinder Morgan Inc (NYSE: KMI), which people close to the negotiations indicate is also interested in acquiring Williams. However, antitrust concerns due to major overlap between Kinder's and Williams' pipelines in several key markets mean a Kinder-Williams deal is not as likely to happen without a potentially major divestment of Williams' assets.
Any interested parties have until the last week in August to submit bids, so we should soon find out whether or not Williams will remain an independent company.
Will a deal happen at all?
How likely is Williams to find a buyer? More importantly, what does a potential merger mean for long-term investors of Williams Companies or Williams Partners? To answer these questions, let's compare Williams Companies' valuation via two important metrics: dividend yield and the EV/EBITDA ratio.
|Company||Yield||EV / EBITDA|
|Energy Transfer Equity||3.5%||13.7|
|Spectra Energy Corp||5%||12.5|
|Kinder Morgan Inc||5.9%||18.1|
As you can see from this table, all four pipeline companies are offering a generous dividend yield that should be attractive to income investors and mean no matter who potentially ends up buying Williams, dividend lovers win.
However, because oil prices have collapsed since the beginning of June and dragged down midstream stock prices, the valuation discrepancy between Williams and its potential buyers has grown. In fact, at Energy Transfer's original buyout offer of $64 per share, Williams Companies would sport an EV/EBITDA ratio of 26.2, double that of Energy Transfer and Spectra Energy.
What does all of this mean for a potential deal? Well, a few things. First, it means Energy Transfer's original offer for Williams was incredibly generous, and not, as Williams' claims, undervaluing its assets and future growth potential.
It also means Williams may have shot itself in the foot. That's because, in my opinion, Williams' decision to reject Energy Transfer's offer and put itself up on the auction block was a move designed to see how high other competitors might bid for its shares. However, the risk is that, if midstream operators' share prices fall during the auction, as they have, then the best offer Williams gets may come in under $64 per share, and the merger may fail.
Bottom line: What should you do now?
If you are a current or prospective Williams Companies investor, keep holding, or consider buying now. No matter the outcome, you are likely to win in the long run because merger or no merger, you'll likely end up owning a high-yielding pipeline operator whose dividend is likely to grow substantially over the next few years.
For current or prospective Williams Partners investors, the answer is dependent on whether you think a deal will happen. If no merger happens, Williams Companies will end up buying Williams Partners, trigger a taxable event for its MLP investors, and you'll end up with Williams Companies shares anyway.
If a merger occurs, Williams Partners -- and its 8.4% yield -- would be more likely to remain independent because all of the potential buyers, save for Kinder Morgan, are structured to, are, or already do own MLPs and could fold the partnership into their existing structure.