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Massive mergers on the rocks

A weekly recap of SNL Energy'scoverage of major themes in the natural gas industry.

Twoof the biggest energy industry mergers in recent history are in serious dangerof falling apart.

Thepath to Energy Transfer Equity LPconsummating its acquisition of WilliamsCos. Inc. is looking rockyas the two companies feud over a March privateoffering by ETE.

Williamsfiled a lawsuitagainst ETE in the Delaware Court of Chancery seeking to unwind ETE's offeringof series A convertible preferred units. The Tulsa-based pipeline operator reviewedETE's private offering and "concluded it is a breach of the mergeragreement," according to the company's statement. "Among otherthings, the offering provides select ETE investors with preferential treatmenton ETE distributions."

Separately,Williams sued ETE's leader, Kelcy Warren, in Dallas County, Texas, for "tortious,or wrongful, interference" with the merger agreement.

Williams'board said the lawsuits are meant to protect the interests of Williamsstockholders and ensure that they receive the consideration they are entitledto under the agreement.

Forits part, ETE confirmed the lawsuits had been filed and said it is prepared tofight the claims as the partnership believes "it has complied, and itintends to continue to comply, with its obligations under the merger agreementwith Williams,"the partnership said in an April 6 Form 8-K.

EnergyTransfer said the offering, completed March 8, would free up cash to supportits family of partnerships and offer protection to participating unit holders fromany distribution cut affecting common units. The offering could not be publicbecause Williams would not cooperate on a registration statement, whichanalysts highlighted as a sign of the "frosty relationship" between the two parties.

The partnership issuedapproximately 329.3 million convertible preferred units to select shareholders,where Warren participated with substantially all of his common units. Theunitholders agreed to forgo a portion of cash distributions for as much as ninefiscal quarters starting with the quarter ended March 31. In exchange, holdersof the convertible units are to receive 11 cents per unit of ETE's distributioneach quarter, while also accruing 17.5 cents per quarter to convert to futureunits, the same amount the participating holders are forgoing of ETE'sdistribution as it stands now. Those units then convert back to common units ata conversion price of $6.56.

Despitecrying foul on the offering, Williams said its board is unanimous on itsintention to complete the deal, "provided that all ETE and Williamsinvestors are treated fairly and equitably," the statement said.

Williamssaid it remains committed to mailing the proxy statement and holding thestockholder vote to close the deal as soon as possible. The transaction issupposed to close during the second quarter, and integration planning isalready underway.

Inthe oil services sector, the pendingmerger of BakerHughes Inc. and HalliburtonCo is also buckling, this time due to an filed by The U.S.Department of Justice, saying the deal "threatens to eliminatecompetition, raise prices and reduce innovation in the oilfield servicesindustry."

Themerger has been repeatedlydelayed by antitrust regulators for more reviews. Most recently,Halliburton and Baker Hughes postponed the closing of their proposed merger andagreed to extend theregulatory approvals until April 30.

Thetwo oil companies pledged tofight the DOJ's efforts to block the pending merger, saying the DOJhas "underestimated the highly competitive nature of the oilfield servicesindustry," the companies said in an April 6 news release.

Thecompanies said the acquisition, valued at $34.6 billion, is "pro-competitive"and will provide an opportunity for customers "to reduce their cost perbarrel of oil equivalent."

Creditand equity analysts saidall of the downside of a failed merger lies with Halliburton and the upside —including a $3.5 billion breakup fee — with Baker Hughes.

Whateveris going to happen will happen soon, FBR & Co. analyst Thomas Curran saidApril 7, with the merger agreement expiring at the end of the month. "[Halliburton]opts to fight; history suggests legal battle could last three to four months,"Curran wrote.

BakerHughes' shares will deliver a quick double-digit-percentage return in the nextthree to four months, Curran said. "We still like [Baker Hughes']risk/reward here: Should the deal fail, it will benefit from the $3.5B breakupfee, with the ability to fully implement restructuring initiatives that havebeen constrained by the merger agreement … and a spreading perception that itis back in play; should the deal succeed, the stock will deliver a 40% return,all else constant, within three to four months," he said.

Therewas little good news April 6 for Halliburton. While the credit rating agencyStandard & Poor's Ratings Services said it expects the merger to eventuallysucceed and maintained both firms' investment-grade ratings, S&P GlobalMarket Intelligence equity analyst Stewart Glickman said it is time to sellHalliburton.

Analystsat Tudor Pickering Holt & Co. questioned the DOJ's anti-monopoly logic buttold their clients April 7 to hold off on splitting the baby: "[Halliburton]and [Baker Hughes] are two of the best oilfield service franchises on theplanet, and we're buyers of both stocks, irrespective of whether they have acombined or independent futures during the next up-cycle" in oil andnatural gas prices.

Standard & Poor's RatingsServices and S&P Global Market Intelligence are owned by McGraw HillFinancial Inc.