It took a lot of persistence and near perfect timing, but Energy Transfer Equity (NYSE:ET) pulled off what could go down as one of the best energy mergers in 2015 after agreeing to acquire Williams Companies (NYSE:WMB). Here's what makes this its best move this year.
Patience pays off
Energy Transfer Equity spent nearly six months trying to engage in "meaningful, friendly dialog" with Williams Companies before making its initial offer to acquire Williams Companies in mid-May via a letter to its CEO. It followed that up with two additional offer letters in June to Williams' board of directors before taking its offer public later that month. That public offer forced Williams Companies to undergo a strategic review of its options. By late September, that review was complete, with Williams Companies having come to the realization that the Energy Transfer Equity offer was actually quite compelling for its investors, especially in light of the continued weakness in the energy market and the way that was spilling over into the equity values of midstream companies.
That weakness was evident when the terms of the agreement were released. After initially offering an all-equity transaction that valued Williams Companies at $53.1 billion in June, the signed deal in late September valued Williams Companies at just $37.7 billion. That's largely due to the fact that the equity value of both companies fell as well as the addition of a cash component to the deal.
An energy behemoth with a massive backlog for future growth
In acquiring Williams Companies, which brings with it control of its master limited partnership Williams Partners (NYSE:WPZ), Energy Transfer Equity will create the world's largest energy infrastructure group and the third largest energy franchise in North America. That increased scale alone is expected to drive in excess of $2 billion of incremental EBITDA by 2020 via anticipated commercial synergies as well as another $400 million in cost savings. There are additional potential opportunities beyond these initial figures, especially when the company begins to migrate some of Williams Companies' assets down to some of Energy Transfer Partners' other entities.
Furthermore, Williams Companies and Williams Partners bring with them a very compelling pipeline of growth opportunities. At its Analyst Day earlier this year, Williams Companies noted that it was pursuing over $30 billion in growth projects through 2018, many of which were already in progress. That's quite a hefty growth pipeline for what at the time of the merger was a $37.7 billion company. Also, a growing portion of these opportunities involve the building of demand-driven energy infrastructure, which benefit from lower commodity prices.
A seemingly great move by Energy Transfer
Scale matters in the energy sector, and with the addition of Williams Companies and Williams Partners to its family, Energy Transfer will have the largest scale in the midstream space. That scale will reduce its costs, improve its cost of capital, and open the door to larger opportunity that its smaller rivals can't handle.
Another reason why this is such a good move is because of the timing. Energy Transfer Equity took advantage of the weakening energy market to target a company that it felt was the best fit for its portfolio. It was persistent and was able to seal an even better deal when conditions further deteriorated. It's the type of deal that could really pay off years down the road after the energy market has recovered.