Williams Companies (NYSE:WMB) scored a key court victory this week after it won a motion to speed up its lawsuit against Energy Transfer Equity (NYSE:ET). At issue is the private offering of Convertible Preferred Units that Energy Transfer Equity issued to some of its unitholders, half of which went to its CEO Kelcy Warren, which Williams says protects them from a future distribution cut. Williams wants to get this suit settled so that the deal can be closed as quickly as possible.
A speedy trial
Williams Companies brought suit against Energy Transfer earlier this month because it was infuriated with the private offering of Convertible Preferred Units that was only made available to some of Energy Transfer's investors and none of Williams. It did not like the fact that these units would allow holders to forgo distributions on their Energy Transfer Equity common units for up to nine quarters, when there's a very real risk that the distribution could be cut leaving other investors short-changed. However, Energy Transfer sees the offering as a way to gain some breathing room because that retained cash flow could be used to pay down some of the incremental debt it is issuing to acquire Williams Companies. Further, Energy Transfer Equity initially wanted to undertake a public offering of these Convertible Preferred Units to all its unitholders but Williams Companies would not sign off on the deal because its investors wouldn't be part of that offering.
Williams Companies is now suing Energy Transfer Equity to unwind the private offering because it says the offering breaches the merger contract, which states that Energy Transfer isn't allowed to "authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock." That suit will now be expedited though the court system so that a conclusion can be reached quickly instead of causing more delays to the merger. It's a deal that Williams Companies' Board of Directors remains unanimously committed to, with hopes that it will close during the current quarter.
What's next on the docket?
At the heart of the issue is the fact that Energy Transfer Equity is borrowing $6 billion to make a cash payment to Williams investors. It's incremental debt that's coming at a bad time given the weakening of credit conditions within the industry, with Williams Companies own credit being downgraded to junk as a result of a weaker outlook for its affiliated MLP.
That downgrade will make it much more expensive for Williams Companies and Energy Transfer Equity to borrow money in the future. That's an immediate concern because the $6 billion in incremental borrowings would be made on a short-term bank credit facility that will need to be repaid within two years. It will now be much more expensive to term out that debt given the weakened outlook for both credit and oil and gas prices. That's one reason why Energy Transfer Equity no longer expects that the merger will deliver $2 billion in commercial synergies by 2020, instead pegging that number as low as $170 million, due in part to the much higher capital costs it will now incur.
Given that the $6 billion of incremental debt has become such a big concern, it's something that both companies will need to address in order to close the merger. It's a concern Energy Transfer Equity wanted to address via the Convertible Preferred offering, but it will now need to have the courts agree that it didn't break the merger agreement with that offering. Anything seems possible at this point, with the potential for the merger to fall apart if this offering did indeed breach the contract. That said, the courts could also rule that this didn't breach the agreement or Energy Transfer Equity could be forced to make this a public offering to all investors in both companies.
With the courts speeding up this suit it could finally bring a much needed quick conclusion to this drama-filled merger. That said, it's still unclear what that conclusion will be with Williams Companies seemingly ready to get this deal closed while Energy Transfer Equity appears much more apprehensive about what the future holds if it does close the deal under its current terms. Needless to say, it will be interesting to see how this one plays out.