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Williams Companies Could Soon Be Facing a Hostile Takeover, and That's Not a Bad Thing

Energy Transfer Equity's proposed $53 billion buyout of Williams Companies is taking a nasty turn. Find out what it means for dividend investors.


Jul 10, 2015 at 4:15PM

The MLP industry usually isn't known for high-stakes drama, but Energy Transfer Equity 's (NYSE:ETE ) $53 billion attempted buyout of Williams Companies (NYSE:WMB ) is taking an interesting and unusual turn -- one that could have massive ramifications for all investors involved.

Energy Transfer is potentially ready to launch a hostile takeover bid

Bloomberg Business is reporting that Energy Transfer Equity's Chairman Kelcy Warren is balking at a request by Williams that any potential acquirer agree to a "standstill" clause -- which would prevent it from buying Williams shares or lobbying its investors -- as a condition to look at its books.

Energy Transfer was none too pleased that Williams made public its offer, which the two companies had been negotiating in secret for six months. According to Bloomberg, as soon as Williams Companies rejected the $64/share bid -- which valued Williams at a 32.4% premium to its June 19 share price -- it began shopping itself to other potential buyers.

In fact, Williams has now approached 15 potential acquirers -- two of which were interested enough to agree to the "standstill" clause -- in an effort to garner a higher buyout price.

On Tuesday, July 7 Energy Transfer announced that while it prefers its acquisition of Williams proceed on friendly terms -- it's offered Williams unfettered access to its books with no strings attached -- it remains fully committed to "taking the necessary steps to implement the proposed transaction with Williams (including soliciting against the Williams and Williams Partners L.P.   (NYSE:WPZ ) merger)."

In other words, Energy Transfer is willing to try to buy Williams even if it has to launch a hostile takeover, something that has become increasingly rare in the MLP industry over the last decade. Let's take a

look at why Energy Transfer is so eager to snap up Williams Companies, and more importantly, whether or not the deal actually benefits long-term investors.

What's at stake for Energy Transfer Equity

Energy Transfer wants Williams because the combined company would become the world's fifth largest energy company by enterprise value and dominate America's natural gas and oil pipeline industry.

Source: Energy Transfer Equity investor presentation.

As this map shows, most of Energy Transfer's existing pipelines are concentrated in the South and Midwest, while Williams has a strong presence in the West, South, and North East. Analysts expect the relatively small amount of overlap between the two company's existing pipeline systems would help it gain regulatory approval.

However, Energy Transfer wants to add Williams to its assets for a more important reason than merely an ego-stroking exercise in empire building -- it's also because Energy Transfer Equity's business model is based on collecting incentive distribution rights, or IDR fees, from its assorted MLPs.

Source: Energy Transfer Equity investor presentation.

As you can see, by merging with Williams, Energy Transfer Equity would grow the amount of cash received from its MLPs by 120%, greatly increasing the chances that it can achieve analysts' projected five-year dividend growth estimates of 24% CAGR.

Such impressive dividend growth, when combined with an already generous 3.1% yield, might help Energy Transfer Equity outdo its impressive historic market-thumping performance.

What this means for Williams investors

Williams Companies rejected Energy Transfer's offer on the basis that it undervalued its shares, an argument that is hard to justify  given the extremely generous premium the $64/share bid represents.

In fact, on an enterprise value/EBITDA basis, Williams is arguably being offered an absurdly high price for its shares -- meaning management may be foolish to expect anyone else to make a higher offer.

Category: Forex

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