Energy Transfer closes in on $34bn Williams takeover

Energy Transfer Equity is close to acquiring Williams in a deal to create an oil and gas pipeline company worth about $59bn, according to people familiar with the matter.

An agreement could be announced as early as Monday, in a sign of how the prospect of a potentially prolonged period of weak oil and gas prices is starting to catalyse deals in the energy sector.

A deal between the two companies would be the first sizeable transaction to be agreed since oil prices slipped back again over the summer. It suggests that buyers’ and sellers’ expectations about valuations — which are generally far apart at a time of volatile commodity prices — may be coming into alignment, helping other proposed deals come to fruition.

Those involved in the negotiations said that although the main points of the deal were essentially agreed, they cautioned that there was always a risk that it could fall apart.

Williams’ board has backed a revised cash and stock offer from ETE, said people familiar with the transaction.

It was unclear how much of the deal would be paid in cash, but one person said the overall deal would value Williams at $34bn.

The valuation of Williams has dropped sharply since ETE made its first approach in late June. That all-equity offer was worth about $64 a share, based on ETE’s then share price, and valued Williams at almost $48bn.

Williams rejected that approach, saying it significantly undervalued the company, but launched a strategic review and began looking for possible buyers.

Several companies, including Kinder Morgan and Spectra were interested in acquiring Williams, but in recent weeks ETE emerged as the only serious bidder, said those involved in the sale.

Since ETE’s approach became public in June, the share prices of both companies have declined significantly. Williams’ shares went down from about $49 to $41.60 on Friday, giving the company a market value of about $31bn.

ETE, as a partnership, has units instead of shares, and those have fallen even more sharply, dropping from $32 a unit (adjusted for the July stock split) in June to about $23 on Friday, giving it a market value close to $25bn.

Up until the end of June, it appeared that oil prices had stabilised, with US crude holding at about $60 a barrel. After that, however, prices took another slide, and US crude was about $45 a barrel over the weekend. Forward prices in the futures market and analysts’ expectations for prices have also fallen.

As transporters rather than producers of oil and gas, neither ETE nor Williams is directly reliant on commodity prices for its revenues. However, their business depends on being able to develop new pipeline projects to generate growth.

If US oil and gas producers are going through a sustained period of financial strain that will force them to cut back on their capital spending and hence production growth, that is likely to mean fewer opportunities for ETE and Williams to grow organically.

The plan also looks like a vote of confidence in the master limited partnership: an alternative way to structure a business that offers tax advantages to companies that own and operate oil and gas infrastructure.

Concerns have been raised about MLPs in recent years, including questions about how they can continue to grow — a key component of their appeal to investors, once they become very large. Last year Kinder Morgan decided to roll up its complex network of partnerships into a single corporation.

Williams in May announced a similar move, saying it wanted to absorb its MLP affiliate, Williams Partners, into the parent group, which is a corporation. However, Kelcy Warren, ETE’s ambitious and acquisitive chairman, has kept the group as an MLP partnership, and has said he wants to keep that structure for Williams Partners.