Williams Companies (NYSE: WMB) and its MLP , Williams Partners (NYSE: WPZ) , have spent the past few years refocusing their portfolio around assets that can drive future growth. That's led both companies to divest some more mature businesses so they can invest in growth projects as well as buy expandable assets that will increase cash flow in the coming years. This strategy has Williams Companies -- which will soon acquire its MLP to form one stronger entity -- on track to deliver high-octane growth in the coming years .
The pipeline company continued that strategy this week by making an interesting trade of sorts that will enhance its growth prospects and its financial profile. It's an excellent move that increases its appeal as an income stock.
Williams Companies got back much more than it gave up in this trade. Image source: Getty Images.
Details on the deals
In the first transaction, Williams Companies announced that it's partnering up with private equity giant KKR (NYSE: KKR) to buy Discovery DJ Services for $1.173 billion in cash. Discovery provides oil and natural gas gathering as well as natural gas processing services in the southern part of Colorado's DJ Basin . Williams will initially own 40% of Discovery, with KKR holding the other 60% stake. However, Williams pledged to invest $250 million in expanding Discovery's system through 2020, which will boost its stake up to 50%. Williams also has the option to acquire additional interests in Discovery from KKR at a set price over the next six years.
Meanwhile, Williams Partners will sell its Four Corners Area (FCA) business in New Mexico and Colorado to privately held Harvest Midstream for $1.125 billion in cash. Those assets consist mainly of natural gas gathering pipelines and processing plants.
Why this trade makes sense (and cents)
These transactions help Williams in several ways. First, it received excellent value for FCA. Williams Partners noted that the business generated $85 million in EBITDA last year and was on track to produce $82 million in 2018. Given the $1.125 billion sales price, it values the business at 13.3 times its enterprise value to EBITDA , which is a very strong multiple for an asset with declining earnings.
To put that into perspective, Williams is only paying a five to six times EBITDA multiple for its investment in Discovery, which includes the roughly $470 million initial payment for a 40% stake and the $250 million in capital expenses it will fund over the next few years. That multiple implies that Williams' investment in Discovery will generate between $120 million to $144 million in annual EBITDA by 2020, more than offsetting the lost earnings from FCA.
Not only does this swap create an earnings uplift, but two other factors enhance the value proposition. First, even after paying for its 40% interest and funding the necessary capital expenses, Williams will have roughly $400 million left over (pre-tax) that it could use to pay down debt or invest in other growth projects. On top of that, the company noted that there are opportunities for additional growth investments on the natural gas liquids side at Discovery. Those factors make the swap an excellent one both now and in the years to come.
A fantastic move
These transactions are a real coup for Williams Companies. Not only did it sell the no-growth FCA assets for a tremendous value, but it's picking up the high-growth Discovery business for a great price. On top of that, these deals will enhance both its growth prospects and its financial profile, which provides further security to the company's 4.6%-yielding dividend. That makes it an even better stock for income investors to consider buying .
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .