Energy Transfer and Williams Head to Court Ahead of Merger Voteby and
Companies have accused each other of breaching agreement
Cost for Energy Transfer to drop deal estimated at $2 billion
One week before Williams Cos. shareholders are set to vote on whether to accept Energy Transfer Equity LP’s takeover bid, the two companies will meet in Delaware to tell a judge how each has violated the terms of the agreement.
The two-day trial, which consolidates several lawsuits the companies filed against each other related to the deal, opens Monday, with Delaware Chancery Court Judge Sam Glasscock set to rule before the June 27 vote. Essentially, each says the other has done things that breached the terms they had agreed to. Williams wants Energy Transfer held to its original offer -- valued then at $32.9 billion -- and Energy Transfer would like Glasscock to rule the violations were grave enough to kill the deal.
It’s “high-stakes M&A poker,” according to a Wednesday clients note by Timm Schneider, an analyst for Evercore ISI. If Energy Transfer is held to the agreement’s now-unfavorable terms, Williams would have a stronger bargaining position to force a settlement, he wrote.
What looked like a good deal in September to create a massive empire of oil and gas networks spanning the U.S. has turned into a nightmare for both as plummeting oil prices upended the logic of their marriage. Three former Williams chief executive officers have urged shareholders to reject the merger, saying the structure of the deal benefits Energy Transfer. Kelcy Warren, CEO of Energy Transfer, has been blunt as well, saying on an earnings call last month that “we can’t close.”
If Energy Transfer is forced to stick to its original offer, Schneider said it could cost the Dallas-based firm as much as $2 billion to get out of the deal. That would cover Williams’ “entire 2016 capital budget and help pre-fund 2017,” he wrote.
Lance Latham, a spokesman for Williams, declined to comment ahead of the hearing and Vicki Granado, an Energy Transfer spokeswoman, didn’t respond to requests for comment.
Since Energy Transfer offered to buy Tulsa, Oklahoma-based Williams for $43.50 a share in either cash or stock in September, the global glut of crude has wiped out nearly half the value of both companies and forced the energy firms to twice slash the expected earnings boost from the merger.
“There’s no way the original deal is going to fly and the Williams folks are going to want to get something out of this mess,” said Chad Ruback, a Dallas-based lawyer who has been following the flurry of lawsuits over the merger. He isn’t representing either of the companies. “There will be either a re-negotiation of the deal or a large-dollar settlement.”
Under the merger agreement, Energy Transfer gets to walk away with little cost. But Williams would have to pay a $1.5 billion breakup fee if it’s the one to terminate the deal. While that’s rare, it’s not unheard of, said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance.
“It may have been that Williams didn’t want to make it difficult for other bidders to come in and top the existing bid,” Elson said in a phone interview.
Energy Transfer, which says it can’t move forward until its lawyers can guarantee shareholders won’t be burdened by tax liabilities, also sued Williams for its breakup fee, claiming the company isn’t cooperating with financing efforts.
If the judge rules Energy Transfer has to stick with the original offer, the company may have little choice but to sweeten the buyout terms or pay a lump sum to walk away, Ruback said.
The trial is a “wild card” and Glasscock “is an M&A guru who is not going to put up with shenanigans,” said Schneider, who recommends buying shares of both companies. “We are hopeful he will be able to guide these bickering midstream giants back to reality.”
The case is Williams Companies Inc. v. Energy Transfer Equity LP, CA12337, Delaware Chancery Court (Georgetown).