Pipeline Giants Merger Still Possible After First Bid Fails

The Williams Companies may have rejected a $53.1 billion buyout bid from Energy Transfer Equity [ETE], but the potential buyer’s boss says this is just the beginning of the effort to merge the two fuel transport giants.

“I believe that a combination of Williams’ assets with ETE will create substantial value that would not be realized otherwise,” Kelcey Warren, the CEO of Dallas-based ETE, said in a statement. “I am truly excited at the prospect of bringing together these two businesses under a common platform and creating additional value for every stakeholder.”

Warren said a merger would greatly enhance the new company’s cash flow, creditworthiness and growth flexibility, and that the current shareholders in Williams would immediately enjoy higher dividends.

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Alan Armstrong, the CEO of Tulsa-based Williams, countered in a statement that ETE’s offer “significantly undervalues” the company. “Our board and management team remain committed to acting in the best interests of shareholders, and in light of the unsolicited proposal, our board believes it is in the best interest of shareholders to conduct a thorough evaluation of strategic alternatives.”

Williams announced its rejection of the ETE bid on June 21, without disclosing which company was interested in buying it. In fact, ETE had been pursuing Williams quietly for months, and only after the rejection announcement did ETE identify itself as the suitor, though it added that it was “disappointed” that it couldn’t continue the negotiations out of the public eye.

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Why? A public pursuit “will certainly make it more contentious,” Jeff Schmidt, the associate of equity research for Tudor Pickering Holt & Co. of Houston, told the Dallas Business Journal. “That’s my gut instinct.”

And Ethan Bellamy, an analyst at the financial services company Robert W. Baird, said the leadership at Williams believes the company may be able to get a better offer from a rival of ETE, such as the Houston-based energy company Kinder Morgan, just as Armstrong's statement indicated.

“Williams board members know that they have a strong asset base, a good growth plan and good management,” Bellamy said. “Williams shareholders should go for the best deal from the highest bidder, not necessarily this one, though that might end up being the case.”

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Some analysts say the ETE offer for Williams is a prime example of expected consolidation in the business of transferring fuels such as gas and oil. Companies that operate pipelines have largely been spared the pain of the sharp decline of oil prices during the past year, but many observers say enlarging their operations through mergers would be profitable regardless of the price of oil.

One of those is Williams, who built up ETE into a fuel transportation giant over the years by moving both gas and oil through a pipeline network totaling about 71,000 miles. He also beat out Williams in a bidding war for Southern Union Co. at a total cost of $5.7 billion.

And now he wants to buy out his biggest competitor altogether.

By Andy Tully Of Oilprice.com

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