Williams-Energy Transfer Deal Is Dead in Wall Street's EyesBy
Market valuing companies like they won't merge, analysts say
Collapse in oil prices dragged down the value of both stocks
In late September, this merger between some of the biggest pipeline operators in the U.S. was touted by analysts as a winning proposition, one that would form a massive empire of oil and gas networks spanning the country. It was an idea so compelling that Energy Transfer offered to pay $6 billion of what was then a $32.9 billion deal in cash.
Oil’s plunge changed everything. It wiped out half the value of both companies. Suddenly Energy Transfer Chief Executive Officer Kelcy Warren’s bet looked expensive. And then things began to really unravel. Energy Transfer fired its chief financial officer. Then it held a private unit offering without Williams’s blessing -- a sale Williams would later call “malicious” and sue over. Today, the two are fighting each other in court for alleged breaches to the terms of their agreement and are arguing over a tax opinion crucial to getting the deal done.
The drama has Wall Street so convinced the takeover will fail that traders have started pricing the companies individually again instead of as a merged entity. Energy Transfer’s latest comments have “solidified for a lot of people that it’s unlikely the deal happens on current terms -- or at all,” Jefferies LLC analyst Chris Sighinolfi said by phone Friday.
The trail of destruction that Energy Transfer will have left in its wake may not bode well for its reputation as a consolidator in the future, Sighinolfi said. What should the market “think about it now -- if it may be impairing its ability to do deals with people, simply because people may not want to do deals with it?”
Energy Transfer spokeswoman Vicki Granado deferred to comments Warren made during a conference call with investors last week. Williams spokesman Lance Latham declined to comment.
In a May 5 call, Warren repeated seven times in a response to an analyst that the deal couldn’t close in its current form. In what has proven to be Energy Transfer’s most compelling argument against the merger’s completion, he stressed that the company couldn’t move forward without a tax opinion that it has yet to be granted.
It’s called a “721 opinion” and would deem the merger an exchange that frees shareholders from tax liabilities. Energy Transfer has said its adviser Latham & Watkins LLP can’t render that opinion and that other tax advisers have given similar feedback. Williams disagreed, saying it knows others who would.
In his four decades of practice, Robert Willens, a tax and accounting consultant in New York, said he’s never seen a deal fall apart because of a 721 opinion. He said he personally would grant Energy Transfer the opinion, while acknowledging that his say isn’t the one that counts in this case.
“I don’t see anything that will move Latham to the point where they issue the opinion,’’ he said.
Officially, the deal isn’t over. The closing deadline is June 28, when either party can walk away from the deal if it isn’t complete. Energy Transfer isn’t allowed to cancel the deal before then, according to the merger agreement’s terms. And Williams would have to pay a $1.5 billion break-up fee if it chose to do so or it is deemed to have broken the terms of the merger agreement, said Michael Kay, an analyst at Bloomberg Intelligence.
In last week’s call, Warren offered up one way in which the deal may be salvaged: A sale involving equity and no cash.
Even that would likely prove futile, as Williams probably won’t budge on the terms, Darren Horowitz, an analyst for Raymond James & Associates, wrote in a note to clients Friday.
In a sign of exactly how pessimistic Wall Street has become, Horowitz said he’s adjusting his Williams valuation in a way that takes Energy Transfer out of the picture. It’s a stark turnaround from early April, when Evercore ISI analyst Timm Schneider surveyed clients and found nearly half thought the deal would close, 35 percent believed it wouldn’t and the rest weren’t sure.
Since then, a spread traded by those betting on whether the merger will fall apart has more than doubled. In late April, it blew out to the biggest since the takeover was announced.
Schneider recently reissued his survey. This time, he included a picture that captures the growing animosity between Energy Transfer and Williams. It’s of a lion and a tiger, circling each other in a pit of water. Their eyes are locked.
The results were announced Sunday: 84 percent of respondents said the current deal won’t close and roughly half said it won’t even get restructured.
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