Williams admits stress fracture in $22 bln deal

June 9, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A supposedly iron-clad $22 billion pipeline deal is starting to show some cracks. Williams Companies said on Wednesday that it expects to cut its dividend if its sale to rival Energy Transfer Equity falls through. Despite ETE’s attempts to renegotiate or wriggle out of the merger, Williams has held firm until now. The payout warning may be a tactic, but the target now seems to be admitting the possibility of failure.

ETE in September agreed to acquire Williams for what was originally $33 billion-worth of cash and stock. That was before the sustained slump in oil prices savaged the stock prices of both companies, raising questions about the deal’s financial logic and the debt ETE is taking on to fund the transaction.

With no easy way out in the fine print of the merger agreement, ETE has turned to unorthodox methods to encourage Williams and its shareholders to reconsider. It slashed by 90 percent its estimate of the financial benefits of the merger, launched a dilutive private share placement and warned of big job cuts in Williams’ home town of Tulsa.

Last month, ETE said that problems securing a tax opinion from its attorneys meant it might not be able to complete the transaction by a June 28 deadline. While Williams may be open to modifying the deal terms, it has filed a lawsuit to stop ETE from using the tax issue as an excuse to abandon the merger altogether.

Shareholders are skeptical. They valued Williams’ equity at just over $17 billion on Thursday – a more than 20 percent discount to the value of ETE’s offer. Yet even as it flagged the threat to the payouts its investors receive, Williams said it was committed to closing the deal as soon as possible following a scheduled June 27 shareholder vote.

The warning may be intended simply to persuade undecided owners. The Williams board may also be acting out of an abundance of caution, given the rising probability that the merger’s fate ends up being decided in court. Either way, it suggests the possibility that a once watertight deal has developed a stress fracture.

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