The proposed merger between Energy Transfer Equity (NYSE:ET) and Williams Companies (NYSE:WMB) is becoming one of the most fascinating boardroom dramas to hit the energy patch in the past few years. Despite what both companies say, neither seems too thrilled with their deal and have been searching high and low for a loophole to break their commitment. The latest attempt at a breakup stems from a tax issue after Energy Transfer's lawyers said that they might not be able to issue an opinion on taxes, which could impact the company's ability to close the deal.
The tax delay
When Energy Transfer Equity and Williams Companies agreed to combine last fall, they decided on a cash-and-stock merger whereby Williams shareholders would receive $8 per share in cash with the rest of the $43.50 merger consideration being paid via shares of a new company called Energy Transfer Corporation. Unlike Energy Transfer Equity this new entity would not be an MLP, but instead would be a C-Corp like Williams Companies. Because of this structure, Energy Transfer noted in the press release announcing the deal that "the transaction is expected to be tax-free to Williams' stockholders, except with respect to any cash received."
However, in an SEC filing this week, Energy Transfer Equity revealed that it had yet to obtain a tax opinion for its proposed merger with Williams Companies from its tax lawyers. What the company needs is a 721 opinion, which would deem the deal to be tax free for Williams shareholders for the stock portion of the deal. As such, it is a potentially big deal breaker for Williams Companies' investors because they could be on the hook for a big tax bill if the completion of the merger is deemed to be a taxable event. That said, Williams disagrees with the opinion of Energy Transfer Equity's lawyers and doesn't think the deal will trigger any taxes for its investors.
Adding it to the list
This latest wrinkle in the deal is the first issue that has come up on the stock portion of the proposed transaction. Most of the issues prior to this have been on the cash portion of the deal, due primarily to the fact that Energy Transfer Equity will be borrowing an incremental $6 billion via a short-term bank loan to pay out the $8 per share in cash to Williams shareholders. It's debt that has the potential to sink both companies due to the oil market taking a turn for the worse since the deal's announcement. The debt has been called "mutually assured destruction" by Energy Transfer Equity's now former CFO, who was reportedly terminated for actively working to sabotage this deal.
It's the potential problems posed by the additional debt that led Energy Transfer Equity to issue Convertible Preferred Units to some of its investors in a private offering. In exchange those investors agreed to forgo their Energy Transfer Equity distributions for up to nine quarters so that the company could use the retained cash flow to whittle down its debt. However, it was an offering that Williams refused to sign off on, which is why it's now suing Energy Transfer Equity in order to reverse that exchange saying it gives favorable treatment to some investors, including Energy Transfers' CEO who was the recipient of half of the units. Not only that but, Energy Transfer had agreed not to "authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock" as part of its merger agreement with Williams. That makes it a potential breach of the merger contract, which could be enough for Williams to terminate the deal if it wins in court.
The merger of Energy Transfer Equity and Williams Companies is looking less likely to close with each passing day. Both companies are searching high and low for the loophole that will get them out of the deal, with the market hoping they find a solution soon. It will be interesting to see if they do find a way out, or if they're forced to close a transaction that at the moment no one wants to see happen, at least under the current terms.