Williams Proves Cheap Target for Pipeline After El Paso Takeover: Real M&A
Kinder Morgan Inc.’s takeover of El Paso Corp. (EP) at the highest premium for a U.S. pipeline operator in 15 years is turning Williams Cos. into the industry’s cheapest takeover target.
Williams, the Tulsa, Oklahoma-based pipeline owner pursuing a separation of its oil and natural-gas exploration unit, yesterday was valued at 7.5 times earnings before interest, taxes, depreciation and amortization, the lowest multiple of any U.S. pipeline company, according to data compiled by Bloomberg. That’s almost half the 14 times Ebitda Kinder Morgan said this week it’s paying for El Paso in a $38 billion purchase that will create the biggest U.S. pipeline operator. The 47 percent premium is the industry’s richest since 1996, the data show.
With 15,000 miles of pipelines delivering about 14 percent of natural gas consumed in the U.S., Williams may lure buyers after American factories, power plants and homeowners burned a record amount of gas last year and the company lost out on a bid for Southern Union Co. (SUG) Enterprise Products Partners LP (EPD), with a market value of $36 billion, may be big enough to take on $16 billion Williams, said T. Rowe Price Group Inc. TransCanada Corp. (TRP) or Enbridge Inc. (ENB) may also feel pressure to add scale after the takeover of El Paso, said Frost Investment Advisors LLC.
“You’re likely to see some additional domino transactions,” Ted Harper, who helps manage $6.8 billion including Williams shares for Frost Investment Advisors in Houston, said in a phone interview. “You could easily see those guys make some moves.”
Jeff Pounds, a spokesman for Williams, didn’t respond to a phone call or e-mail seeking comment.
Shares of Williams climbed 5.5 percent to $29.06 today in New York. The gain was the biggest among 15 companies in the Dow Jones Utilities Average.
Williams runs three natural-gas pipelines that serve more than 30 million homes in markets such as Seattle, New York, Atlanta and Florida. Most of the interstate pipelines are assets of Williams Partners LP (WPZ), a master limited partnership that is 75 percent owned by Williams.
Kinder Morgan said Oct. 16 that it agreed to buy Houston- based El Paso for cash, a portion of Kinder Morgan stock and a warrant to later buy Kinder Morgan shares. Valued at a combined $26.87 a share, the deal is 47 percent higher than El Paso’s average in the prior 20 trading days. That’s the steepest premium of any U.S. pipeline operator takeover greater than $1 billion after the 48 percent premium Houston Industries Inc. offered for NorAm Energy Corp. in 1996, data compiled by Bloomberg show.
Biggest Pipeline Operator
Kinder Morgan said its purchase of El Paso will create a company with 80,000 miles of pipelines, surpassing Enterprise Products’ 50,000 miles to become the biggest U.S. pipeline operator.
“This sets the stage for consolidation and gaining competitive advantage through scale,” said Andrew Steinhubl, a Houston-based partner at consulting firm Bain & Co. and co-lead of its North America oil and gas practice.
El Paso had said in May that it would spin off its exploration and production unit, which Houston-based Kinder Morgan now plans to sell to help fund the acquisition.
Three months earlier, Williams had also announced it would sell 20 percent of its exploration and production division in an initial public offering and then spin off the rest next year. In August, Williams Chief Financial Officer Donald Chappel said the company may cancel the IPO if the stock market continues to decline and instead spin off the entire unit.
Today after U.S. markets closed, Williams disclosed that it scrapped the IPO and will spin off the business by yearend.
Similarly, Atlas Energy LP announced yesterday that it will separate its exploration and production business into a master limited partnership.
“Splitting up makes it more digestible,” Timothy Parker, a portfolio manager who oversees about $4.3 billion in natural- resource stocks at T. Rowe, said in a phone interview. “Is Williams in play more than it used to be? Yeah, maybe. But you will need a big company.”
T. Rowe owned 5.2 million shares of Williams as of June.
Williams yesterday had an enterprise value, or the sum of its equity and debt minus cash, of about $25.7 billion, or 7.5 times its Ebitda of $3.4 billion in the last 12 months. No U.S. pipeline company was cheaper, data compiled by Bloomberg show.
Even if Williams commands a takeover premium comparable to El Paso, the company would have a total value of about $33 billion, or 9.7 times Ebitda, still cheaper than 71 percent of industry deals greater than $1 billion, the data show.
“Williams is the most likely takeout target” in the pipeline industry because it has a low valuation and no state utilities, Rebecca Followill, managing director and head of equity research at U.S. Capital Advisors LLC in Houston, said in a phone interview. “The question is, does Williams accept an offer or does Williams approach someone else and say, I want to buy you?”
The company was in a bidding war for natural-gas pipeline owner Southern Union, which agreed to be bought by Energy Transfer Equity LP (ETE) in July for $9.3 billion including net debt. Williams CEO Alan Armstrong told investors a month ago that the company is “well positioned” if it wants to make another bid for Southern Union after its previous offers were rejected.
Texas to Pennsylvania
New drilling techniques have allowed energy companies to unlock previously inaccessible oil and natural gas all over North America, depressing prices of both commodities while driving demand for more pipelines, Bain’s Steinhubl said. Pipeline operators have profited even as a glut of supply from new wells in Texas, Arkansas and Pennsylvania slashed prices 16 percent. A record 24.1 trillion cubic feet of gas was burned in the U.S. last year, according to the Energy Information Administration.
With Kinder Morgan already buying El Paso, that may leave Houston-based Enterprise Products as the only viable acquirer for Williams, said T. Rowe’s Parker. Enterprise Products, now the second-biggest U.S. pipeline operator after Kinder Morgan-El Paso, has a market value that’s more than double the size of Williams. Enterprise Products has spent about $24.6 billion on acquisitions since the start of 2000, according to data compiled by Bloomberg.
“You do have a limited set of suitors,” Parker said. “Enterprise is sufficiently big to do something like that.”
Rick Rainey, a spokesman for Enterprise Products, declined to comment on whether the company is considering a bid.
“Our strategy that we’ve demonstrated is built around organic growth, and we continue to pursue that strategy and build value for our shareholders in that way,” Rainey said. “I’m not saying that acquisitions aren’t part of our overall strategic options, but we see the multiples as not being attractive at the moment.”
TransCanada and Enbridge, both based in Calgary, also have enough scale to attempt a takeover of Williams, said Harper of Frost Investment Advisors. TransCanada, which is awaiting U.S. approval for its $7 billion Keystone XL pipeline that will transport Canadian oil from Alberta to Texas refineries, has a market capitalization of C$30.1 billion ($29.4 billion). The company is also working on projects in power transmission and renewable energy.
“Looking forward, the company is focused on completing the remaining $10 billion of projects that are part of its capital program,” Terry Cunha, a spokesman for TransCanada, said in an e-mail response to a question regarding the company’s interests in potential acquisitions.
‘On the Lookout’
Enbridge, the largest transporter of Canadian crude to the U.S., has a market capitalization of about $26 billion and said last month it will build a pipeline with Enterprise Products to move crude from a bottleneck at Cushing, Oklahoma, to refineries on the U.S. Gulf Coast.
“We evaluate all options to grow our businesses; however, we currently have an unprecedented slate of organic growth opportunities ahead of us which will generally have better economics underpinning them than acquisitions,” Jennifer Varey, a spokeswoman for Enbridge, said in an e-mail. “We’re always on the lookout for opportunities, but there are none that I could speak to at this point in time.”
It’s “certainly always possible” Williams will be the next acquisition, Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in a phone interview.
“There is great demand for the build out of energy infrastructure,” Ghriskey said. “We found all this natural gas suddenly and it has to get transported.”