By Alison Sider and Anne Steele 

A rift between two pipeline companies in the midst of a $32.6 billion merger deepened Wednesday when Williams Cos. said it was suing Energy Transfer Equity LP over a private share offering that Energy Transfer undertook to help finance the deal.

A Williams suit against Energy Transfer filed in the Delaware Court of Chancery, seeks to unwind the private offering of the preferred units.

A separate Williams suit against Energy Transfer Chief Executive Kelcy Warren in a Texas district court alleges tortious, or wrongful, interference with the companies' Sept. 28 merger agreement as a result of the private offering.

Williams said Wednesday that it continued to support the merger and wasn't trying to get out of the deal, which would create a massive U.S. network of natural-gas pipelines.

"Williams remains committed to working with ETE to ensure the financial strength of the combined company, provided that all ETE and Williams investors are treated fairly and equitably," the company said in a statement. Williams looks forward to completing the transaction and delivering its benefits to the company's stockholders."

A spokeswoman for Energy Transfer said the company didn't have an immediate comment on the suits.

The legal dispute is the latest problem facing a deal that was contentious from the start, and has become more challenging as low oil prices have made it difficult for pipeline companies to raise money.

Williams had resisted Energy Transfer's initial buyout overture but eventually capitulated after Energy Transfer offered to pay for part of the deal with cash -- up to $6.05 billion.

Energy Transfer issued the convertible units last month to certain investors, including Mr. Warren, who owns about 18% of Energy Transfer Equity's shares, saying the savings would help pay for the cash portion of the deal without taking on as much debt. Those investors agreed to take a lower quarterly distribution payment in exchange for more shares down the road.

Energy Transfer said at the time that it planned a convertibles offering to the public, but switched to a private placement after Williams objected.

But Williams said in its suit that the convertible units were really just a way to insulate Energy Transfer executives from an eventual cut in the distribution, which breached the merger agreement by giving them preferential treatment over Williams investors. Williams alleged that Mr. Warren designed the special offering to protect his own interests over those of Williams and other Energy Transfer investors -- more than half of the new units were issued to him.

"With full knowledge that ETE may cut its distributions significantly, Mr. Warren designed the Special Offering to ensure that he personally will continue to receive cash distributions at current levels, while other investors in ETE may not," the suit alleges. Williams investors, who would receive shares of a newly created entity called Energy Transfer Corp., "will not be guaranteed any distributions and may well get none at all," Williams argued.

Hinds Howard, portfolio manager for master limited partnerships at CBRE Clarion Securities, said the securities were "spun in a positive way, but didn't seem like they were enough to outweigh the negatives of separating management from the rest of the owners."

"I've never seen anything like this -- a board that hates what the management team is doing enough to sue, but still wants to do the deal," Mr. Howard said.

Still, experts say the deal would be difficult to get out of unless Williams shareholders vote it down. Williams would have to pay Energy Transfer a breakup fee of $1.48 billion if it walked away. And Energy Transfer would likely be sued for breach of contract if it terminated the agreement, observers say.

The companies predicted that combining their network of natural gas pipelines and other energy infrastructure would add as much as $2 billion in annual pretax earnings. But in a recent filing, Energy Transfer said persistently low oil and natural gas prices had eaten into the opportunities for synergy, and reduced its predicted benefit to $170 million without a substantial uptick in commodity prices.

Low commodity prices have also fueled worries that the customers that ship oil and natural gas will go under, pulling pipelines down with them. Struggling producer Chesapeake Energy Corp. is a major customer, of Williams and worries about Chesapeake's condition have at times been a drag on both Williams and Energy Transfer shares in recent months.

Earlier this year, Energy Transfer fired its chief financial officer, Jamie Welch, with little explanation. Mr. Welch is now suing the company for breach of contract.

Energy Transfer shares, battered 79% over the past 12 months, rebounded 9% to $7.04 Wednesday, while Williams shares, down 71% in the same period, rose $5.2% to $15.58.

Write to Alison Sider at alison.sider@wsj.com and Anne Steele at Anne.Steele@wsj.com

 

(END) Dow Jones Newswires

April 06, 2016 14:24 ET (18:24 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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