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'We don't have a deal': ETE/WMB merger likely dead absent restructuring

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'We don't have a deal': ETE/WMB merger likely dead absent restructuring

The existing EnergyTransfer Equity LP and WilliamsCos. Inc. merger agreement will not be able to close, because lawfirm Latham & Watkins has concluded that it cannot deliver a tax opinionrequired as a condition to closing, ETE executives said May 5.

The tax opinion qualifies Williams' contributions of assetsand liabilities to ETE and ETE's issuance of class E units to Energy TransferCorp. as an exchange.

"The merger agreement specifies that this opinion mayonly be rendered by Latham," CFO Thomas Long said during the partnership'sfirst-quarter earnings call. "Latham really scrubbed this issue beforereaching its conclusion."

Long said other legal advisers reached independentconclusions similar to Latham's and ETE agrees with the conclusions.

"We believe that the inability of Latham to render thisopinion as of the date of the most recent amendment will result in the existingtransaction not being able to close, regardless of whether Williams obtainedstockholder approval for the merger, " Long said.

Energy Transfer units traded up 8% to $13.20 in earlytrading on the NYSE. Williams shares were roughly flat at $19.24.At market close on May 5, Energy Transfer units closed up byabout 7.1% to $13.07, while Williams shares had risen 6.9% to $20.57.

"We can't close this transaction," Kelcy Warren,head of the Energy Transfer family, said during the call. "Absent asubstantial restructuring of this transaction — which Energy Transfer has beenvery willing, and actually desiring, to do — absent that, we don't have a deal."

Section 721 specifies that a partnership cannot realize anygains or losses when it takes on property in exchange for interest in the partnership.Thomas Mason, Energy Transfer Equity's executive vice president and generalcounsel, said the companies did not realize until recently that Section 721would apply to the Williams merger.

"It was one of those light-bulb things that came abouta few weeks ago," Mason said during the call. "Initially we just didn'tbelieve that [it] would be an issue, [but legal counsel] concluded that it wasa problem — a big problem."

The original merger agreement between the two in September 2015 valuedWilliams shares at $43.50 apiece and included a $6 billion cash componentfor a deal value of $37.7 billion. The slump in crude oil prices and pressureon midstream stocks in late 2015 and early 2016 sent the value of bothcompanies tumbling, leading to what appeared to be buyer's remorse for ETE.

Warren had been courting Williams since February 2014, butsince the agreement was struck, one set back after another strained therelationship between the companies. The pair had gutted expected synergies fromthe deal, and have suedeach other over a private offering that ETE completed in March.

"This is the Cuban missile crisis of mergers,"Ethan Bellamy, a Denver-based analyst for Robert W. Baird & Co said inearly April. "Bothof these parties are better off alone. They are going to keep hammering away ateach other until one blinks and walks away, or until the merger iscompleted."

Williams responds

During Williams' earnings call, held right after ETE wrappedup, the company showed no signs of giving up on the agreement.

"With respect to the pending merger I will mention thatthe Williams Board is unanimously committed to enforcing its rights under themerger agreement … and to delivering the benefits of the merger agreement toWilliams stockholders," Director of Investor Relations John Porter said. "Williamsis committed to mailing the proxy statement, holding the stockholder vote andclosing the transaction as soon as possible."

Prior to the start of the question and answer section withanalysts, CEO Alan Armstrong showed no interest in fielding any inquiries aboutthe day's developments.

"I'd just like to ask you to keep your questionsfocused on our first quarter 2016 results. We know there's a lot of interest inother topics. But that's what we're prepared to talk about today," he said.

Alternativetransaction structures

In an updated registration statement filed May 4, EnergyTransfer detailed why its legal advisors do not expect to be able to providethe 721 Opinion, and noted that the fall in ETE unit prices since the deal wasannounced has increased tax risks.

The document notes that Williams disagrees with Latham'sopinion, but has offered two alternative transaction structures that itbelieves would address ETE's concerns. ETE believes William's proposals stillhold "substantial risk of material taxation."

On June 28, either party can walk away from the agreement.ETE executives said they are not focused on that date, and are still movingforward to find some way to get to closing.

However, the merger agreement does have a provision thatallows either party to extend the outside date from June 28 for 90 days if allregulatory approvals have not been obtained.

"We anticipate having all the regulatoryapprovals by that date, so we don't anticipate that the 90 day extensionwill come into play," Mason said.