Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Usually, when you discover something you've worked for isn't going to pan out, it's a dark moment. But business is far from usual these days in the world of Energy Transfer Equity, pipeline giant and nominal suitor of Williams Cos.

Energy Transfer held its quarterly results call on Thursday morning. The numbers themselves beat expectations on most fronts, although on the key metric -- namely, affiliate Energy Transfer Partners' dividend cover -- a wide gap has opened up compared to a year ago.

Still, all anyone really cares about at this point is whether or not Energy Transfer will consummate its takeover of Williams Cos., valued at $37 billion when it was announced just over 7 months ago. And chairman Kelcy Warren's take, in response to a question, was unambiguous:

I'd like to be really direct about this. We can't close. We don't have a transaction that can close. So I want to be very clear: We can't close this transaction ... So, absent a substantial restructuring of this transaction -- which Energy Transfer has ... been very willing and ... actually desiring to do -- absent that, we don't have a deal.

As reported a few weeks ago, Warren's desires have been thwarted by those pesky lawyers hired by Energy Transfer, who have suddenly found they can't give a favorable tax opinion on the deal. Imagine the glum faces and groans in Dallas when that was discovered.

Yet Energy Transfer's general counsel referred to it this way on Thursday's call:

I guess it was one of those light-bulb kind of things that came about a few weeks ago.


The upshot is Energy Transfer believes the deal as is -- with that all-important $6 billion cash element threatening to torpedo the balance sheet -- won't stand. Williams, which was largely reticent about the deal on its own call Thursday, disputes this. But the market seems to think otherwise.

Hmm, Nah. Can't See It Happening
Williams' discount to the implied value of Energy Transfer's offer
Source: Bloomberg

Energy Transfer has done several things that might persuade Williams' shareholders to vote against the deal, from jettisoning its chief financial officer to eviscerating synergies estimates. It has also issued Warren and several other insiders with new preferred securities that protect them -- but not everyone else -- from a likely dividend cut (Energy Transfer even listed this move under the heading "recent key accomplishments and other developments" in Wednesday evening's release, which almost counts as trolling). But this tax obstacle now seems to be the crux of the matter, at least as far as Energy Transfer is concerned.

Warren went on to say the deal could close if the cash element was taken out of the equation:

An all-equity structure is better for both us and Williams. I mean, you've got to realize, these people are going to be unit-holders of us going forward, or shareholders, whatever the case may be.  And ... to burden this resulting combined entity with that much debt is just not, that's just not good business judgment.

Warren is right here -- up to a point. Taking on $6 billion of debt is crazy in this environment for master limited partnerships.

For example, also on Thursday morning, fellow MLP Plains All American Pipeline was announcing good quarterly results but downgrading its full-year guidance. Why? Although its oil-price expectations have been pretty spot-on, those prices are holding up in part because E&P companies are running a third fewer rigs than Plains anticipated. Higher prices don't help entirely if they are predicated on less oil flowing through pipelines -- which illustrates perfectly how uncertain the outlook is for debt-laden MLPs such as Plains and Energy Transfer.

Williams' shareholders would, of course, be getting paid that $6 billion, so they may not entirely share Warren's view. It was, after all, the decision to make a bid necessitating an extra $6 billion of debt, when already a year into an energy-sector crash, that actually counts as "not good business judgment."

Still, Warren is unambiguously right about one thing: If the deal goes ahead, then Williams' shareholders would be hitched to Energy Transfer's wagon. Even if, at current prices and on current terms, about 28 percent of the offer came in cash, then they would still be putting a lot of trust in Warren. Absent the cash they'd be all-in, which ought to be a non-starter. The likelihood of Williams shareholders walking is rising. That lawyers on both sides will be very busy for a while yet is almost certain.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at