Energy Transfer to Take Over Williams, Shares Plunge

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Shares of Williams CompaniesWMB plummeted over 12% following the announcement that it has agreed to be acquired by Energy Transfer EquityETE . Investors did not favor the buyer either. Units of ETE plunged nearly 13%.

The agreement is valued at about $37.7 billion and includes assumption of debt and other liabilities. The deal amount, however, is much lower than the $48 billion offered by ETE in June, which Williams had rejected.

The agreement also includes termination of the merger agreement between Williams and its subsidiary Williams Partners WPZ . Due to the cancellation of the contract, Williams will pay Williams Partners about $428 million in termination fees. This amount will be paid through a waiver of quarterly distributions that Williams Partners needs to pay to Williams.

Notably, the notion of canceling the WMB-WPZ merger was earlier rejected by Williams. This is because earlier the company believed that it could achieve higher growth on a stand-alone basis and through its proposed merger with Williams Partners.

The combined entity to be formed with the WMB-ETE merger would become the third-largest energy franchise in North America. The company will also rank among the top five energy companies worldwide.

Agreement Terms

Energy Transfer Corp. LP, an affiliate of Energy Transfer Equity, will acquire Williams for an implied current price of $43.50 per Williams share. The new company - Energy Transfer Corp. - will be publicly traded on the NYSE as "ETC".

Williams' shareholders will have the option to receive ETC common shares and/or cash in exchange for their holdings, subject to proration if either is oversubscribed.

Williams' shareholders electing to receive only stock will receive 1.8716 ETC common shares for each Williams share they hold, before proration takes effect. If all Williams shareholders elect to receive all cash or all stock, they would receive $8.00 in cash and 1.5274 ETC common shares for each share they hold.

Also, Williams' stockholders will receive a one-time dividend of 10 cents per share prior to the closure of the deal.

Moreover, Energy Transfer Equity will issue ETC a number of ETE Class E common units, which will be equal to the number of shares that will be issued by ETC following the deal. These units will receive the same distribution as that for ETE unitholders.

Deal Benefits

The offered price marks a substantial premium to Williams' current price. The exchange of shares for Williams is expected to be tax free. Moreover, the deal is likely to result in faster dividend growth than what the company would have achieved under the WMB-WPZ deal.

The buyout deal is expected to be accretive to the distributable cash flow and per unit distributions for Energy Transfer Equity. Also, this should positively impact the partnership's credit rating.

Moreover, the combined entity is anticipated to benefit from cost synergies of about $400 million. Also, the combined entity will benefit from contributions from the MLPs Energy Transfer Partners, L.P. ETP , Sunoco Logistics Partners L.P. SXL and Williams Partners.

What Spooked Investors?

Williams' shareholders are upset about the reduced value of the deal that lost them money. Moreover, terminating the deal with Williams Partners involves a termination fee.

Energy Transfer Equity unitholders' concern possibly lies in the firm's announcement of changing its corporate structure to C-corp from the MLP structure. This transformation could affect the tax-benefits received.

Nevertheless, several analysts are of the opinion that the deal could bring long-term benefits. Also, many of them believe that the sell-off could have stemmed from bad timing of the deal and panic selling.

Zacks Rank

Currently, both Williams Companies and Energy Transfer Equity carry a Zacks Rank #3 (Hold).

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WILLIAMS COS (WMB): Free Stock Analysis Report

WILLIAMS PTR LP (WPZ): Free Stock Analysis Report

SUNOCO LOGISTIC (SXL): Free Stock Analysis Report

ENERGY TRAN PTR (ETP): Free Stock Analysis Report

ENERGY TRAN EQT (ETE): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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