Deals

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.

As we all know, the course of true love never runs smooth -- especially when it courses through a tangled mess of pipes.

In the formerly unromantic world of pipeline operators, this week kicked off with a marriage and ended with a tiff. Enbridge's $28 billion merger with Spectra Energy, announced Tuesday, rightly stoked expectations of more to come. On Thursday, though, two of the likeliest candidates traded some grade-A passive aggression.

First up was the rumored acquirer, Enterprise Products Partners:

Enterprise Products Partners L.P. (NYSE: EPD) generally does not comment on market rumors or speculation. However, due to recent news leaks, movements in the price of the partnership’s common units as well as questions from investors, Enterprise announced that it has withdrawn its indication of interest in The Williams Companies.

Sad! It went on:

After extensive analysis of public information regarding Williams, we submitted non-binding proposals to Williams to combine Williams and Enterprise. As a result of rumors with respect to our proposals, as well as the lack of engagement by Williams, we have determined that there is no actionable path forward toward an agreement.

In case you missed the sick burn buried in there among all those "Williams," it was the bit about "the lack of engagement." I'll come back to that in a minute, as it is very important.

Williams was having none of it:

Williams confirms that, since July, Williams has had a series of exchanges with Enterprise regarding a potential combination. As Williams recently communicated to Enterprise, the Williams Board, including the three new directors, with the assistance of legal and financial advisors, was engaged in the process of carefully reviewing the most recent indication of interest from Enterprise. As such, Williams is surprised by today’s announcement from Enterprise. As always, the Board remains open to considering any potential strategic alternative that would maximize value for stockholders.

Here, Williams claims injury, casting itself as having asked for time to consider a proposal only to find their apparent suitor had already dumped them on Twitter.

There is, though, likely much method in this madness.

Enterprise's press release did two things. First, it cleared the air somewhat. Reports of its interest in Williams first surfaced in mid-August. Since then, Enterprise's units have lagged the pipeline sector. Merging with Williams, with its enterprise value of almost $60 billion -- before even considering its associated master limited partnership -- makes sense strategically, but would be a huge step (Enterprise's own enterprise value is around $80 billion).

What's more, Enterprise is structured as an MLP, whereas Williams is a regular corporation, complicating what would almost certainly have to be an all-stock or largely stock deal. So persistent talk about a pursuit, spiced with the occasional rumor of a sweetened offer, could have dogged Enterprise's units for months. Thursday's announcement nipped that in the bud.

The clue that it was about more than this was the "lack of engagement by Williams" remark. Entirely unnecessary. Gratuitous, almost.

Except Enterprise -- with its reputation for being careful in a sector where many lost their heads during the pipeline boom -- doesn't really do "gratuitous." It knows Williams is in a proxy fight with two activists who have complained, among other things, about Williams' apparent unwillingness to engage in serious talks with Enterprise about a deal. The activists' case is weakened by their involvement in pushing Williams to do another deal a year ago, the failed takeover by Energy Transfer Equity. But that debacle left a cloud hanging over Williams and its management exposed when it comes to how they handle M&A. Hence Williams' swift contradiction of Enterprise's narrative on Thursday.

Enterprise's carefully chosen words can't be so easily dismissed, though. For a start, the very fact it chose to publicly air its disappointment, thereby putting pressure on Williams' management at a bad time, indicates it hasn't given up entirely. What's more, with its relatively pristine balance sheet and solid reputation, Enterprise resembles a nice, sensible doctor type, in contrast to the brash biker that was Energy Transfer, which took Williams' shareholders on a thrilling ride for several months only to dump them.

Don't forget, also, the market's reaction to that Enbridge-Spectra tie-up:

Come Together
Both target and acquirer in the Enbridge-Spectra deal have outperformed their rivals since the deal's announcement
Source: Bloomberg
Note: Performance indexed to 100 on the last trading day before the announcement of Enbridge's merger with Spectra.

Scale and synergies make mergers an attractive prospect in pipelines after the crash. Williams' stock dropped 4 percent on Friday morning while Enterprise's held pretty steady. For all the harsh words, don't bank on this being a clean break.

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

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net