UPDATE 1-Energy Transfer to buy rival pipeline company Williams Cos

28 Sep 2015 | Author: | No comments yet »

$38 billion merger: Pipeline giants strike deal.

Investors are balking at Energy Transfer Equity’s (ETE -8.9%) just-announced merger with Williams Cos. (WMB -8.6%), as shares in the two oil and gas pipeline companies sell off sharply.Dallas billionaire Kelcy Warren has closed the deal to acquire pipeline company Williams Co., ending a lengthy pursuit that initially drew opposition from management at the rival firm.New York: Energy Transfer Equity LP won its bid to take over Williams Cos., agreeing to pay $37.7 billion (Dh138.41 billion) for control of the company’s pipelines and plants that handle almost a third of rising US natural gas demand.

WMB appears not to have needed to do much to sweeten its offer: “At first glance, it seems as if the bid matches ETE’s original offer made in June,” Raymond James analysts say – since both companies’ shares have fallen since the potential deal first became public, the headline deal number is now much lower than the $48B value announced in June. While plunging oil and natural gas prices have not hit pipeline operators as hard as other energy companies, analysts say the group is facing pressure to merge; prices also have fallen for fuels such as ethane and propane, which has hurt companies like WMB, which processes natural gas. Natural-gas prices have remained low, the price of oil the companies also transport has tumbled, and the outlook for growth in the pipeline industry has dimmed.

The move is in the latest of a string of deals from Warren, who has proved himself an aggressive deal maker in recent years, acquiring Sunoco and Southern Union in 2012 and then Susser Holdings, which owns the Stripes gas station chain, last year. The takeover comes as a record volume of natural gas flows out of the Marcellus shale formation centred in Pennsylvania, now the largest and most prolific US gasfield. Despite the immediate negative reaction, ETE claims the merger will enable it to capture $2.4B or more in commercial and cost-saving synergies over the next few years. The dramatic fall in crude prices since last summer, the result of a surge in U.S. oil production and uncertainty in the global economy, has only sparked his interest. “You try to guess the bottom, and you’re always wrong. The surge in output from the region has upended the nation’s gas markets, as well as the majority of the US pipeline network that was previously designed to deliver gas from the Gulf Coast. “It’s going to be good to control a lot of long-distance pipelines because the pricing is going to move around the country,” Skip Aylesworth, who helps manage about $6 billion for Novato, California-based Hennessy Funds, including shares in both companies, said in an interview last month.

But in the end, Dallas-based Energy Transfer prevailed with a bid that values Williams shares at $43.50, a 4.6% premium to their closing price Friday. The exchange ratio in Monday’s deal is the same as the original offer, accounting for Energy Transfer’s 2-for-1 stock split in July, but Williams shareholders now have the option to receive stock or cash, up to $6.05 billion. Its lines connect some Energy Transfer businesses. “Williams adds scale, complimentary assets that enhance services to producers, synergies and significant potential commercial growth opportunities,” Elvira Scotto, an analyst for RBC Capital Markets, wrote in a June 22 note to clients. More critically, Energy Transfer is willing to put more than $6 billion in cash into the deal Warren’s interest in the Tulsa-based Williams first came into public view in June when management there fought back Warren’s initial all-stock offer for the company.

The transaction ranks among the largest in the North American pipeline industry, which last year saw Kinder Morgan Inc. consolidate its partnership assets into one company through transactions with an enterprise value of more than $40 billion, according to data compiled by Bloomberg. Tulsa, Okla.-based Williams’s 10,000 mile Transco natural gas network is thought of as the company’s crown jewel and is a critical fuel link between Texas and the Northeast. But Monday Williams’ executives said after “extensive discussions with other parties” they concluded the deal with Warren was in shareholders’ best interests. “As a combined company, we will have enhanced prospects for growth, be better able to connect our customers to more diverse markets, and have more stability in an environment of low commodity prices,” Williams CEO Alan Armstrong said in a statement Monday. Williams, with more than 30,000 miles of pipeline, offers Energy Transfer the chance to expand its business moving natural gas around the country, along with the opportunity to move into the Western United States and Canada, where oil sands have become a large new source of crude. Combining with Williams would “vault [Energy Transfer] into a league of its own in terms of midstream size,” a report by Bank of America Merrill Lynch this summer read.

Under the deal, Williams would keep its own name and headquarters, along with a “meaningful ongoing presence” in Tulsa, a statement from Energy Transfer said. In July, a partnership controlled by Marathon Petroleum Corp., a refinery and pipeline company, said it would buy MarkWest Energy Partners LP for $15.8 billion. Many energy infrastructure companies are set up as partnerships that promise to distribute increasing amounts of cash to investors, which puts them under pressure to build new projects or to buy rivals to keep growing. These companies have some protection from low prices because they often have contracts in place that keep fees coming in even if prices for the commodities they handle fall. But a prolonged downturn could call into question the need for more infrastructure, and the prospect of slower production growth could mean fewer opportunities for companies to grow organically.

Energy Transfer controls three other partnerships: pipeline owner Energy Transfer Partners LP, fuel distributor and retailer Sunoco LP, and Sunoco Logistics Partners LP, an owner of pipelines carrying crude oil and refined products. Williams Partners will retain its name and partnership structure, and will also receive a $428 million breakup fee for the termination of the agreement with its parent.

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