Williams Accuses Its Would-Be Leader of Malicious Unit Offering

  • Company says Energy Transfer CEO maliciously arranged offering
  • Energy Transfer agreed to take over Williams in September

Williams Cos. is accusing its would-be leader of “maliciously orchestrating” a unit offering that would guarantee him more than $200 million a year in payments at the expense of other investors.

The pipeline giant, which in September agreed to be taken over by Kelcy Warren’s Energy Transfer Equity LP, filed suit in Texas Wednesday accusing Warren of seeking to “enrich himself” with a private equity sale that went forward without Williams’ blessing. It’s the latest hiccup in a merger that has seen its value crater as the companies’ stocks have dropped by more than 60 percent. They’ve both said they’re still committed to closing the deal.

Collapsing oil prices are weighing on the value of both of the companies’ shares, casting doubt on whether Energy Transfer, the midstream giant founded by Warren, will actually follow through with its purchase of Williams. In its legal challenge, Williams argued that its stockholders, slated to receive shares of a new Energy Transfer affiliate as part of the deal, may be deprived of distributions because of the offering that Warren led last month.

Warren designed the offering “to guarantee himself at least $53 million every quarter,” potentially through May 2018, Williams said in its lawsuit. “By contrast, Williams’ stockholders, who will receive ETC common shares, will not be guaranteed any distributions and may well get none at all.”

‘Internal Pressures’

While challenging its buyer in court, Williams said in a statement Wednesday that it’s committed to mailing a proxy statement for the deal, holding a vote and closing the transaction as soon as possible.

For its part, Energy Transfer said the company has complied and plans to continue to comply with the terms of the merger agreement with Williams. The pipeline operator said in a statement that it’ll “vigorously defend against the claims made by Williams.”

The lawsuit “will create internal pressures at Energy Transfer Equity,” said Skip Aylesworth, who manages $1.5 billion in holdings at Hennessy Funds in Boston. “Kelcy will pound the table as soon as he’s been summoned for subpoena or something, to say, ‘Get me out of this thing.’”

Two Lawsuits

The lawsuit is one of two that Williams filed on Wednesday regarding last month’s private offering. In the second one filed in Delaware Court of Chancery, Williams said it’s seeking to unwind the transaction, arguing that it gives preferential treatment to “select investors.” That complaint is sealed.

The offering essentially created a two-class structure that would subordinate Williams shareholders if the merger went through, said Ethan Bellamy, a Denver-based analyst for Robert W. Baird & Co. who rates Energy Transfer neutral and doesn’t rate Williams. Warren took part in the offering “with respect to substantially all of his common units,” or about 18 percent of the company’s total outstanding common units, according to company filings.

Last month, Energy Transfer and Williams lowered the potential earnings boost from merging the two companies to $170 million a year, down from an estimated $2 billion six months earlier. Oil prices have plunged by almost $10 a barrel and natural gas is down 25 percent since they agreed to the deal.

Energy Transfer said in a filing last month that it had issued 329.3 million convertible units to holders as part of the private offering. The holders in turn agreed to forgo a portion of their potential cash distributions for as many as nine quarters. Energy Transfer had said it went ahead with the private offering after Williams blocked a public one that would’ve been available to all of its common unit holders.

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