Williams Sues Energy Transfer Over Disputed Private Offering

  • The companies' shares have strugged since they agreed to merge
  • The fall in oil prices has complicated the planned deal

Williams Cos. said it sued Energy Transfer Equity LP and its chairman to unwind a private unit offering that Williams says interferes with a planned merger of the rival pipeline operators valued at $32.9 billion at the time the deal was announced.

Energy Transfer’s recent offering of convertible preferred units breached a merger agreement reached in September and gives preferential treatment to "select investors," Williams said Wednesday in a statement. The suit, filed in Delaware Court of Chancery, is sealed.

Williams on Wednesday filed a separate complaint in Texas state court against Energy Transfer’s billionaire chairman, Kelcy Warren, accusing him of wrongfully interfering in the merger deal. A motion to seal that complaint is pending.

"Mr. Warren has sought, through the special offering, to obtain great wealth at the expense of other ETE unitholders" and current Williams stockholders, the company said in the complaint against Warren.

The dispute arose over a private offering of Series A convertible preferred units that Energy Transfer disclosed in a filing in March. In the Wednesday statement, Williams said it’s committed to mailing a proxy statement for the deal, holding a vote and closing the transaction as soon as possible.

Pipeline Operators

The suits are the latest obstacle in a roller-coaster of a deal between the two pipeline operators announced in September. Since Energy Transfer offered $43.50 apiece for Williams shares, the market value of both companies has fallen more than 60 percent, dragged down by the collapse of oil prices. That has cast doubt on whether the deal to create the third-largest energy franchise in North America will actually close.

The offering created a two-class structure that would effectively 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.

"In my view the convert compromises the spirit of the merger agreement," Bellamy said in an e-mail Wednesday. "But whether it constitutes a technical breach of the agreement, with WMB holders due compensation, only a judge and jury can decide."

Calls and e-mails to Williams spokesman Tom Droege and Energy Transfer spokeswoman Vicki Anderson Granado weren’t immediately returned.

Pay Debt

Energy Transfer disclosed in a March filing that it completed a private unit offering that it may use to help pay debt associated with its planned purchase of Williams. Williams had earlier blocked its proposal to hold a public offering and wasn’t involved in the private one.

Energy Transfer said in the filing that it had issued 329.3 million convertible units to holders who in turn agreed to forgo a portion of their potential cash distributions for as many as nine quarters. At the time, the company 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.

Energy Transfer ultimately didn’t seek Williams’s approval for the private offering to "certain accredited investors" because it believes both the public and private options would have been permitted under the merger agreement, according to the company’s filing.

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 the filing.

Energy Transfer shares gained 6.8 percent at 11:42 a.m in New York trading. Williams’s shares rose 1.42 percent.

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