If EnergyTransfer Equity LP's takeover of rival midstream operatorWilliams Cos. Inc. issupposed to be a friendly merger, the friendship appears be on the rocks as thetwo companies feud over the consummation of the corporate marriage that wasproposed in September.
In the latest, Williams is seeking to a private offering by suitor EnergyTransfer, which it claims threatens the merger agreement. Suits against ETE andits leader Kelcy Warren personally claim the offering is a breach of the mergeragreement, providing "select ETE investors with preferential treatment onETE distributions."
Despite crying foul on the offering, Williams says its boardis unanimously committed to completing the deal, which its shares at $43.50 apiece inSeptember and included a $6 billion cash component. The slump in crude oilprices and pressure on midstream stocks have since sent the value of bothcompanies tumbling. The acrimonious relationship between the companies has ledto doubt about the deal's viability.
For its part, ETE confirmed the lawsuits had been filed andsaid it is prepared to fight the claims.
"ETE believes that it has complied, and it intends tocontinue to comply, with its obligations under the merger agreement withWilliams and intends to vigorously defend against the claims made by Williams,"the partnership said in an April 6 Form 8-K.
The back and forth has analysts unsure how the deal willprogress.
"This is the Cuban missile crisis of mergers,"Ethan Bellamy, a Denver-based analyst for Robert W. Baird & Co said in anemail. "Both of these parties are better off alone. They are going to keephammering away at each other until one blinks and walks away, or until themerger is completed. This could go anywhere from here."
ETE disclosed the details of the offering on March 9. Thepartnership issued approximately 329.3 million convertible preferred units toselect shareholders, where Warren participated with substantially all of hiscommon units. The unitholders agreed to forgo a portion of cash distributionsfor as much as nine fiscal quarters starting with the quarter ended March 31.In exchange, holders of the convertible units are to receive 11 cents per unitof ETE's distribution each quarter, while also accruing 17.5 cents per quarterto convert to future units, the same amount the participating holders areforgoing of ETE's distribution as it stands now. Those units then convert backto common units at a conversion price of $6.56. If the conversation date is inMay 2018 and the Williams deal closes in the second quarter, Jefferies LLCanalysts estimated, each convertible unit accrual will equate to about 0.24 ETEcommon unit.
Dallas-based ETE said it would have offered essentially thesame deal to all unitholders, but Williams "declined to allow itsindependent registered accounting firm to provide the auditor consent requiredto be included in a registration statement for a public offering," thefiling said.
"As a result, in light of what the partnership viewedas an important step to address potential cash needs, including to finance partof the consideration payable to [Williams] stockholders in the merger, thepartnership determined to conduct a private offering to certain accreditedinvestors that was not subject to the SEC rules requiring the consent of[Williams'] independent registered accounting firm," the document said. "Inconnection with the proposed public offering, [Williams] advised thepartnership that [Williams] believed its consent was required under the mergeragreement for the public offering and declined to consent. The partnershipbelieves that both the proposed public offering and the completed privateoffering are permitted by the terms of the merger agreement and as a result didnot request [Williams'] consent to pursue the private offering."
In an April 6 statement, Williams said it is fighting theoffering on two fronts. One suit filed against Energy Transfer in DelawareCourt of Chancery seeks to undo the offering of the convertible units. A secondfiled against Warren in Dallas County, Texas, is for "tortious, orwrongful, interference with the merger agreement executed on September 28,2015 as a result of the private offering of Series A Convertible PreferredUnits."
ETE was earlier forced to dramatically its expectations of the earningsincrease it would see from the Williams transaction. In a March 23 filing, thecompany said expects about $170 million in commercial synergies, compared to $2billion that was forecast when the deal was announced. The change in outlookwas announced weeks after ETE replaced CFO Jamie Welch, who had helpedorchestrate theWilliams deal.
Amid the feuding integration planning for the two companiesis underway, Williams said in its statement. It will forge ahead with neededapprovals for the deal, including mailing a proxy statement to shareholders,holding a stockholder vote and the closing of the transaction, expected in thesecond quarter, as soon as possible.
"The litigation is intended to ensure that Williams'stockholders will receive the consideration to which they are entitled underthe merger agreement," the company said.
And in a letter to Williams employees, CEO Alan Armstrongurged his employees to stay focused on their roles and continue to operate assafely as possible.
"We reviewed ETE's private offering and concluded it isa breach of the merger agreement," he wrote. "I recognize theoriginally proposed merger timeframe has been delayed and acknowledge theuncertainty that this brings. However, I can't stress enough the importance ofeach one of us remaining focused on our roles and doing the best job we can inthe safest possible manner."