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UPDATE: Gas pipeline giant Williams to roll up its MLP in $10.5B deal

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UPDATE: Gas pipeline giant Williams to roll up its MLP in $10.5B deal

Williams Cos. Inc. intends to roll up its master limited partnership by acquiring the 256 million Williams Partners LP shares it does not already own for $10.5 billion, the natural gas pipeline giant announced May 17.

Under the deal, Williams would acquire all of Williams Partners' outstanding public common units at a 1.494 ratio of Williams common shares for every unit of Williams Partners, according to a company release. The deal represents a premium of 6.4% based on closing prices on May 16.

The company was expected to green-light the transaction after the Federal Energy Regulatory Commission's March 15 decision to eliminate oil and gas pipeline MLPs' ability to recover an income tax allowance in their cost-of-service rates. Williams Partners is exposed to cost-of-service-based assets through its flagship Transcontinental Gas Pipe Line Co. LLC system and other assets. The deal represents a 13.6% premium to closing prices on March 15.

Williams expects to have a 1.7x distributable cash flow coverage after the deal, which would allow it to reinvest excess cash in "attractive" capital projects. It would also simplify the company's organizational structure and extend the period for which Williams would not pay taxes through 2024.

Williams had planned to acquire its MLP in 2015 for $13.8 billion, but terminated that agreement in favor of the ill-fated combination with Energy Transfer Equity LP. The deal with Energy Transfer collapsed in June 2016 after ETE's law firm could not generate a tax-free opinion for the combination.

The board of Williams Partners' general partner asked a conflict committee of independent directors to review the deal. That committee approved the transaction. The boards for Williams and Williams Partners' general partner also approved of the deal.

The deal will be taxable to Williams Partners unitholders. Assuming the deal closes before Williams' regular third quarter dividend date, the transaction would result in five dividends during the calendar year for Williams Partners unit holders, which would work out to a 15% increase to previously guided distributions, according to the release. If it closed after that period, the exchange ratio will be increased to 1.513.

Williams reviewed the deal with ratings agencies and expects to maintain investment-grade ratings consistent with Williams Partners' current ratings.

"As a fast-growing, investment grade C-Corp with the best natural gas infrastructure assets in the sector, we are confident this combined entity will provide a compelling investment opportunity to a broader range of investors," Williams' President and CEO Alan Armstrong said.

The merger is scheduled to close in the fall of 2018. Morgan Stanley & Co. LLC and Gibson Dunn & Crutcher LLP acted as Williams' financial adviser, while Davis Polk & Wardwell LLP acted as legal adviser. Evercore served as the financial adviser and Baker Botts LLP as the legal adviser to the conflicts committee of Williams Partners.