Williams Companies' Megamerger Finally Official: What Dividend Investors Need to Know

After a long bidding process, Energy Transfer Equity is finally snapping up Williams Companies. Find out what the highly complex deal means for long-term dividend investors.

Adam Galas
Adam Galas
Oct 6, 2015 at 9:25AM
Energy, Materials, and Utilities

After much drama and a protracted secret bidding process that involved some of the biggest names in the midstream industry, Energy Transfer Equity (NYSE:ET) finally came out on top, with Williams Companies (NYSE:WMB) agreeing to its $37.7 billion buyout offer.

Let's take a look at what the incredibly complicated deal means for investors in both companies, as well as Williams Companies' MLP Williams Partners (NYSE: WPZ). More importantly, find out how you can best profit from one of the most important energy megamergers of the past few years.

Massively complex deal...simplified

Source: Energy Transfer Equity-Williams Companies Merger presentation.

The specific terms of the merger -- which is expected to close in the first half of 2016 -- are incredibly complex, but the big picture is that Williams Companies' previously announced buyout of Williams Partners is now dead. Williams shareholders will have the option of being paid $43.50 per share, plus a one-time dividend of $0.10 per WMB share, in either shares of a newly formed C-corp called Energy Transfer Corp. -- which will trade under the ticker ETC -- or cash. The share option will make the deal a non-taxable event, while investors choosing cash will end up owing the IRS a cut of their proceeds.

Energy Transfer Corp. will give all of Williams' assets and liabilities to Energy Transfer Equity, which is itself an MLP. In exchange, for each share of ETC created by the deal, Energy Transfer Equity will issue and give a class E unit of itself to Energy Transfer Corp. These units will pay distributions from which ETC will fund a quarterly dividend to its shareholders.

Basically, Energy Transfer Corp. will become a C-corp alternative to Energy Transfer Equity, which will now serve as manager and general partner to the four publicly traded MLPs, and the private LNG partnership that make up the Energy Transfer empire.

Source: Energy Transfer Equity-Williams Companies Merger presentation.

Thus, Energy Transfer Corp.'s creation will allow more investors to participate -- such as tax-deferred investors, as well as institutional investors, pension funds, endowments, and foreign investors -- in the high-yield, high-distribution-growth awesomeness that comes from managing the largest collection of energy transportation, storage, and processing assets in America.

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In fact, the new Energy Transfer empire will now include around 104,000 miles of natural gas, natural gas liquids, oil, and refined product pipelines, which transport about 15% and 35% of all U.S. oil and natural gas, respectively.

In addition, Energy Transfer's MLPs will control 11 billion cubic feet per day of natural gas processing capacity, America's third largest natural gas liquids business, 5% of American gas station retail sales, and 15% of currently approved LNG export capacity. 

What it means for investors in each company and Williams Partners
Wlliams Companies investors who choose the tax smart option of receiving ETC shares will benefit mainly in two ways. First, they will receive a higher dividend in 2016 than Williams Companies would have paid them without the merger. They will also own shares that will yield around 5% at today's prices, and experience -- according to analyst projections -- 21.7% dividend growth over the next five years. That's far superior to the 10% to 15% dividend growth through 2020 Williams Companies was previously guiding for before merger negotiations began.

Better yet, Energy Transfer Equity estimates that by 2020 it will be able to squeeze out $2 billion in annual EBITDA synergies, which would represent a 20% increase in today's combined EBITDA across the Energy Transfer family. These cost savings and commercial synergies -- which are larger than initially projected -- should allow for the superior payout growth to last longer than previously anticipated.

Williams Partners will continue to exist as a stand-alone MLP and benefit from up to $400 million in annual distributable cash flow or DCF synergies by 2020, half of which will go to Energy Transfer Equity per the incentive distribution rights or IDRs that it just purchased.

Meanwhile, Energy Transfer Equity will benefit from an improved credit rating that will give it greater access to cheaper capital with which to grow its empire -- which with an approximate enterprise value of $150 billion will be the largest energy infrastructure company in America, and the fifth largest energy company in the world.

Takeaway: The deal means Energy Transfer Equity is poised to become one of America's best dividend growth stocks
Based on the deal and how it ended up being structured, investors really need to take another look Energy Transfer Equity units or Energy Transfer Corp shares when they begin trading. That way you can benefit from a combination of not just a generous current yield -- one that's secured by almost $4 billion in annual distributions Energy Transfer Equity receives from its MLPs -- but also one of the best likely future payout growth rates of any dividend stock in America.