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Analysts praise Williams' private equity JV amid muted investor reaction

Investors were lukewarm on Williams Cos. Inc.'s gas gathering and processing joint venture with the Canada Pension Plan Investment Board even as industry analysts praised the partnership's benefits for the pipeline heavyweight's balance sheet.

The pension board plans to invest about $1.34 billion in Williams' fully owned Ohio Valley Midstream and Utica East Ohio Midstream systems and take on a 35% ownership stake. This will enable the pipeline company to put more money toward paying debts and reducing spending, according to midstream equities analysts at Mizuho Securities USA LLC and Jefferies. In a note to clients, Mizuho dubbed the pension board a "deep-pocketed" private equity partner, while Jefferies welcomed the strength the board brings as a financial partner.

Shareholders' reaction was tepid in comparison to the analysts' responses and expectations. Williams units were up just 2.1% as of 12:45 p.m. ET on March 19, trading at $28.37 per share following the March 18 late-afternoon announcement.

The Mizuho analysts had said they expected market reaction to the deal to be "favorable" both as a leverage reduction vehicle and as a sign that Williams will not overextend itself when it comes to M&A.

In tandem with announcing the joint venture worth $3.8 billion, Williams closed its purchase of a 38% stake it did not already own in the Utica East Ohio midstream system from Momentum Midstream LLC, which is backed primarily by private investment fund Yorktown Partners LLC.

"Management had previously spoken of being a consolidator in the Marcellus/Utica. We think there was a degree of investor angst in the market as to whether [Williams] intended to acquire third-party assets in the basin ... and going against a desire for [Williams] to get more focused [and] reduce exposure to gathering & processing," Mizuho analysts wrote. "We think the CPPIB JV should alleviate these concerns."

Analysts at energy investment bank Tudor Pickering Holt & Co. added that Williams' stock price performance has boosted the pipeline company's capacity for buying out Momentum Midstream's Utica East Ohio system even though it is still focused on shedding debt.

"While we continue to like self-help initiatives undertaken by management, recent equity out-performance coupled with level setting of throughput expectations on back of producer budget revisions across [gathering and processing] footprint screens as a reasonable time to take some gains," Tudor Pickering Holt wrote in a March 19 note to clients.

Analysts at Stifel Nicolaus & Co. Inc. estimated the pension board's acquisition to be 17 times the total distributions Williams receives from the stake, in line with the positive trend of "private capital valuing midstream assets higher than the public market," they said in a March 19 note to clients.

The pension board's acquisition is scheduled to close in the second or third quarter.