Photographer: Daniel Acker/Bloomberg

This Widening Gap Has a Williams Takeover Looking Riskier

  • Deal spread for Energy Transfer-Williams takeover has expanded
  • Both may benefit from renegotiating terms: portfolio manager

In weighing the odds of a planned takeover, there’s usually one thing you can count on for Wall Street’s opinion: the merger arbitrage.

Not so much in the case of Energy Transfer Equity LP’s bid to buy pipeline giant Williams Cos. -- a multibillion-dollar deal that has been cast into doubt given the oil market’s collapse. Reading this deal’s arbitrage spread, traded by those betting on whether it’ll close, has proven tricky. The spread between Energy Transfer’s offer and Williams’ share price has widened in the past four days, more than doubling to $3.52 by 11:28 a.m. Wednesday in New York City trading, signaling more risk in the deal falling through. But that’s still down from almost $7 in mid-January, and news affecting both stocks has turned it into a moving target.

What the gap illustrates more than anything is “a lot of uncertainty” in what’s going to happen with the deal, said Christopher Pultz, a portfolio manager of Kellner Merger Fund, part of Kellner Capital in New York. “There’s a possibility of a restructuring, and there’s a possibility it doesn’t happen.” Meanwhile, “the prevailing wisdom still is that the deal gets completed” because the terms of the transaction are so binding, he said. 

The spread has been knocked around in recent months by news. First, pipeline operator Kinder Morgan Inc. slashed its dividend, touching off speculation that others would follow. Then Williams’ credit ratings were downgraded. Last month, Williams affirmed its commitment to the takeover. But on Feb. 5, Energy Transfer replaced its chief financial officer. A Debtwire report that Chesapeake Energy Corp., one of Williams’ pipeline customers, was bringing on restructuring attorneys was later dismissed by the company. Oil prices have, of course, also taken a toll on both stocks.

‘Just Brutal’

“It’s just brutal right now because of the volatility and the constant flow of news,” said Michael Kay, an energy equity research analyst for Bloomberg Intelligence in New York.

Lance Latham, a Williams spokesman, declined to comment Tuesday on the likelihood of the deal closing. Energy Transfer didn’t immediately respond to requests for comment.

Williams may prove to be worth more if it doesn’t go through with the deal, Timm Schneider, an analyst at Evercore ISI, wrote in a note to clients Wednesday.

What makes the spread even more difficult to read is the fact that deal spreads in general are widening across industries because of market volatility and investors becoming increasingly averse to risk, Pultz said. So while a $3 gap may have pointed to a deal unraveling in the past, it isn’t looking as bad today, he said.

Energy Transfer offered $43.50 apiece for Williams shares in September. The transaction was valued at about $33 billion at the time. Williams has fallen 70 percent since then, while Energy Transfer is down 77 percent.

“There seems to be a lot is going on behind the scenes, which is causing a lot of uncertainty and really taking a toll on both stocks,” Pultz said. It would probably be “beneficial for both parties to look to renegotiate the deal.”

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