Williams Sues Merger Partner Energy Transfer
April 06 2016 - 02:39PM
Dow Jones News
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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