Why Williams rejected a $53 billion takeover bid
By Michael Drost
So, that happened. Natural gas pipeline giant Williams Cos., already in the midst of its own merger talks, confirmed over the weekend that it had rejected an unsolicited $53 billion takeover from an unnamed buyer, later revealed to be Energy Transfer Equity. The attempted takeover, which comes on the heels of similar acquisitions in the upstream sector, has put to rest any notion that the pipeline industry will remain insulated from the recent plunge in oil and gas prices.
Since last summer, crude oil prices have fallen nearly 50 percent, from over $110 per barrel in August 2014 to just over $60 today. That has sparked a number of mergers and acquisitions, including the recent $70 billion takeover of Britain’s BG Group by Royal Dutch Shell, as strong companies vie to take over weaker ones. This activity has, for the most part, been relegated to exploration and drilling companies, with pipeline companies being largely ignored from consideration as low oil prices hit small and mid-sized drilling companies the hardest.
Now that oil prices have recovered slightly, analysts predict the pipeline industry may be next on the consolidation block, with recent moves indicating that other pipeline companies may become merger targets. Earlier this year, Energy Transfer Partners announced an $18 billion consolidation of its MLP interest Regency Energy Partners, resulting in lower payments to general partner Energy Transfer Equity. Williams also consolidated its MLP business Williams Partners last month.
Williams says that the price Equity Transfer offered, which would have made the purchase the biggest energy deal this year, was too low, and would require they abandon the purchase of its MLP business. Analysts say that Williams may have wanted to guarantee it would not get a better offer from a rival, such as Kinder Morgan, and that the deal may ultimately go forward. Williams maintains that bringing Williams Partners back into the fold is the best way for it to reduce costs and increase dividends for shareholders.
According to the Wall Street Journal, regional specialists may make good acquisition targets, including Targa Resources Corp, a large pipeline operator in West Texas. As investments in MLP style structures become safer bets given the instability of oil prices, the push to consolidate will become greater, as companies look to find new ways to guarantee higher dividends to shareholders. This will make other companies that run major pipelines, such as Oneok, which has one of the largest natural gas pipeline networks in the country, prime merger candidates.
Consolidation would also simplify the complicated general partner/limited partner relationship, allowing pipeline operators to benefit from smaller contractual payments and improved liquidity. That Williams reneged on a $53 billion offer based to the conclusion it “would not deliver value commensurate with what Williams expects to achieve on a stand-alone basis and through other growth initiatives” is partly due to the belief that the company’s worth as a consolidated entity is more than what Equity Transfer gave it credit for.
Williams says that it will continue to look at “strategic alternatives”, including merger, sale, or continuing business as usual. Whether they become join forces with another party or stay independent, one thing for sure: the pipeline sector is changing, and it’s changing fast.
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