Investors balk at Energy Transfer’s $34bn merger with Williams

Investors have greeted Energy Transfer Equity’s merger agreement with Williams, which will create one of the largest oil and gas pipeline groups in the US, by steeply marking down the valuations of both businesses.

The price of ETE’s units, which it has instead of shares, were down more than 10 per cent at $20.75 in afternoon trading in New York, while Williams’ stock was down almost 10 per cent at $37.54.

Other oil and gas pipeline companies were also dragged down by a more than 2 per cent fall in crude prices on Monday, with units in Enterprise Products Partners, which is not involved in the ETE deal for Williams, down 6 per cent.

ETE first tried to acquire Williams in June with a $64 a share offer that valued the company at $48bn. The bid was rejected because it was considered too low. Williams then began a strategic review that included a search for other suitors, according to people familiar with the matter, while negotiating the ETE offer’s complex structure.

Since then the value of Williams has fallen sharply because of the sharp drop in energy prices that has hit the entire sector. In June, Williams was trading at $49 a share.

ETE’s units have fallen even more sharply from $32 a unit (adjusted for the July stock split) in June to about $21.30 on Monday, valuing it at close to $23bn.

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“After a comprehensive evaluation of strategic alternatives, including extensive discussions with numerous parties, the Williams board of directors concluded that a merger with Energy Transfer Equity is in the best interests of Williams’ stockholders and all of our other stakeholders,” said Frank MacInnis, chairman of the Williams board.

Under the terms of the stock-and-cash agreement, ETE will offer 1.8716 shares in a new company called Energy Transfer Corporation (ETC) for each share in Williams. ETC will in turn hold units in the ETE partnership, such that the shares and units are intended to have the same economic value.

However, the tax treatment of corporations is different from partnerships in the US, and the liquidity of the two securities may also be different

Kinder Morgan and Spectra were among those companies interested in acquiring Williams, according to people familiar with the matter.

ETE and Williams are not directly reliant on commodity prices for revenues as they are transporters, not producers, of oil and gas. However, the decline in energy prices is negatively affecting producers, which are some of their main clients.

US oil and gas producers are facing sustained financial strains, which are forcing them to cut back on their capital spending. Such cuts mean that opportunities are fewer for ETE and Williams to grow organically.