By Angela Chen
The giant natural-gas pipeline company Williams Cos. is buying
up the portion of subsidiary Williams Partners that it doesn't
already own in a $13.8 billion all-stock deal.
The deal will provide tax benefits to Williams, but some of the
partnership's investors could be hit with an unexpected tax bill
when they exchange their partnership interests for company
shares.
Following in the wake of Kinder Morgan Inc.'s $44 billion
consolidation with its pipeline partnerships last year, the
Williams deal confirms that some of the energy industry's biggest
infrastructure companies are turning away from the tax-advantaged
partnership structure, which has been hugely popular with
individual investors.
Master limited partnerships aren't subject to income taxes at
the corporate level and pay hefty cash distributions to limited
partners, which are usually untaxed unless investors sell the
units. This type of merger triggers a forced sale and thus a tax
bill.
The amount investors will owe can vary widely, depending on when
they bought their shares and other factors. Williams hasn't
estimated what investors will owe but that amount will likely be
somewhat offset by the premium they will receive, which is about
14.5% over the price the partnership units have traded at
recently.
Under the deal, Williams Cos. agreed to swap 1.115 shares for
each unit of Williams Partners. In the aggregate, Williams will
issue 275.4 million shares, which is about 27% of the total shares
of the combined company.
Shares of Williams Partners surged 22% to $57.93 after the deal
was announced while shares of Williams Cos. rose 6% to $53.07.
Energy companies have used the partnership structure to raise
billions of dollars in the last few years. But the structure can be
complex and some partnerships end up being squeezed by large
payments they make to the sponsoring company. The payments are
meant to encourage the company's management to keep paying out more
to investors, but can become a financial burden on the partnership
as it tries to grow, making it difficult to raise capital.
So some analysts have been expecting more simplification deals,
and they say the Williams merger likely won't be the last. Last
week, a smaller midstream company, Crestwood Equity Partners LP,
unveiled a $3.5 billion merger to simplify its structure by taking
a master-limited partnership back in house.
"If you need to be more competitive, you need to be focused on
lowering cost of capital," said Raymond James energy analyst Darren
Horowitz. Williams is "thinking this is the right thing to do for
the next 10 to 15 years. And I agree."
After the Williams deal closes, likely in the third quarter, the
combined company will be one of the largest energy infrastructure
companies. Executives at the company, which is based in Tulsa,
Okla., said it would be more efficient and better positioned to
grow, and will be better able to keep increasing its dividend by
10% to 15% a year through 2020.
"This strategic transaction will provide immediate benefits to
Williams and Williams Partners investors," said Chief Executive
Alan Armstrong.
By buying its partnership's assets, Williams can reset the clock
on depreciation of assets, something that will translate into $2
billion in tax savings over 15 years, the company said. Becoming a
regular corporation also opens the door to more resilient
institutional investors who are typically shut out from the tax
advantages partnerships offer.
In February, Williams completed the merger of two master limited
partnerships it controls--William Partners and Access Midstream
Partners--into one giant natural-gas pipeline system under the
Williams Partners name. The company has sought to increase its
presence in shale formations where drillers are using new
technologies to produce more oil and natural gas.
Write to Angela Chen at angela.chen@dowjones.com
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