Energy Transfer Cleared to Walk Away From Williams Takeover

  • Judge rules Energy Transfer can back out of $33 billion deal
  • Williams shareholders still scheduled to vote on deal Monday

Billionaire Kelcy Warren just won a huge hand in the biggest M&A poker game he’s ever played in the U.S. oil patch.

Eighteen months after Warren’s Energy Transfer Equity LP began talks to acquire rival pipeline giant Williams Cos., a Delaware judge ruled on Friday that the company can back out of the nearly $33 billion deal.

The development marks the latest twist -- but probably not the last one -- in what has become the energy industry’s deal from hell. The proposed Energy Transfer-Williams tie-up, hailed by Warren before the price of oil fell by half, now stands as one of the largest deals undone by the plunge in prices that has sent shock waves through companies, industries and entire economies. Williams is widely expected to appeal and its shareholders are still scheduled to vote on the takeover on Monday.

“Williams has failed to demonstrate that the partnership has materially breached its contractual obligation,” the judge said in his ruling, adding that he rejected Williams’ claim that lawyers withheld a tax opinion as a way of allowing Energy Transfer to back out of the deal. The law firm “in good faith determined that it cannot issue an opinion,” he said.

Enforcing Rights

Williams remains committed to completing the merger and will “enforce its rights” under the terms of its agreement if Energy Transfer attempts to terminate the pact, the company said in a statement. Energy Transfer said in its own statement that it doesn’t believe advisers will render the necessary tax opinion before June 29, the date on which the company is entitled to terminate the merger based on the judge’s ruling.

Technically, what Chancery Court Judge Sam Glasscock ruled is that Energy Transfer is entitled to terminate the merger after its advisers said the deal didn’t free investors from tax liabilities. But in many ways the deal began to break down almost from the start as oil sank lower than either expected, undoing the economic logic of the takeover and prompting both companies to accuse each other of sabotaging the deal.

“This is the outcome that the market priced in Tuesday mid-morning based on the judge’s comments,” Brandon Blossman, an analyst at Tudor Pickering Holt & Co., said by e-mail Friday. “I’m in the camp (with most others) that everybody is better off if both management teams get back spending 100 percent of their focus running their respective businesses.”

Energy Transfer rose 7.9 percent to $14.92 in after-markets trading, and Williams was down 6.8 percent at $19.86.

Williams is likely to appeal Glasscock’s ruling after shareholders have their say and Energy Transfer makes a final decision June 28 on whether to press ahead with the merger. The Delaware Supreme Court will review Glasscock’s ruling.

A voracious deal-maker, Warren built the Dallas-based company from a regional player to a pipeline giant through acquisitions from Michigan to Florida. Williams would have been his biggest deal yet. Six years ago, Energy Transfer was a little-known family of partnerships with about $6 billion in revenue and pipelines that moved nothing but gas almost entirely within Texas. Today, it’s a 71,000-mile oil-and-gas transportation-and-processing web that spans the country and exports worldwide. 

Little Interest

Warren would have walked away from the Williams deal in December if he could have, according to his former chief financial officer Jamie Welch. The CEO showed little interest in offers from Williams to restructure the deal and was more concerned with its impact on Energy Transfer’s future, Welch said.

“He was of the belief if we had to close the transaction, we would have a credit-ratings downgrade that could create an implosion,” Welch said in a video deposition played during the trial.

Energy Transfer had argued the company couldn’t close the deal because it might not qualify as an exchange that frees shareholders from tax liabilities totaling an estimated $1 billion. Williams’s lawyers countered that the U.S. Internal Revenue Service routinely cleared such deals as exchanges and accused Warren of using the tax issue as a pretext to scuttle the deal.

The judge rebuffed Williams’s arguments, saying he found no evidence the pipeline operator “manipulated the knowledge or ability of Latham” to independently evaluate the issue.

Bad Faith

Williams also claimed Energy Transfer showed bad faith in selling 329.3 million convertible units in a private offering to select investors whose cash distributions would be protected even if it decided to cut the payout to remaining shareholders.

Williams argued that Warren -- whose primary source of income comes from distributions -- engineered the sale to protect his personal wealth, guaranteeing him more than $200 million a year in payments, at the expense of Williams’s shareholders and other Energy Transfer investors.

Glasscock passed on deciding whether Williams equity offering violated the merger agreement, saying that he didn’t need to address the issue since the tax complications fouled the deal.

The judge said his decision on the tax question doesn’t “prevent Williams from arguing” that Energy Transfer’s offering was at odds with the merger agreement “should the issue be relevant to further proceedings in the matter.”

Warren’s dealing put Energy Transfer in the ranks of pipeline giants including Enterprise Products Partners and Kinder Morgan and had Warren reaching even higher. Last spring he told Bloomberg News he saw the company doubling its pipeline mileage in the next decade to 150,000 miles. Then he pursued Williams.

The case is Williams Companies Inc. v. Energy Transfer Equity LP, CA12337, Delaware Chancery Court (Georgetown).

Before it's here, it's on the Bloomberg Terminal.