The proposed acquisition of The Williams Companies by Energy Transfer Equity appeared to hit another speed bump this week as the latter company said it could not confirm that the deal would carry the tax advantages its advocates once hoped for.
The would-be merger partners had anticipated that under Section 721(a) of the US tax code the deal would be tax-free to Williams' shareholders and Energy Transfer Equity's unitholders.
However, in a filing with the US Securities and Exchange Commission Monday, Energy Transfer Equity said its financial advisors, Latham & Watkins LLP, reported that were the deal to close Monday, the advisors could not deliver that favorable 721 opinion.
The discussion about the tax issue was included in a section of the filing labeled, "Risks Related to the Merger -- There is no assurance when or if the merger will be completed."
Williams disagreed with that position and the two companies remain in negotiations on the issue, Energy Transfer Equity said in its filing.
"[Energy Transfer Equity] and [Williams] are currently discussing the matter and the impact that it may have on the closing of the merger," Energy Transfer Equity said.
A Williams spokesman said the company maintains that the merger, announced last September, will go forward.
The tax opinion glitch is just the latest hiccup in a proposed merger that has had more than its share of problems.
Investors had initially welcomed the proposed combination, which would create one of the largest interstate pipeline networks in the world.
However, as continued low oil and natural gas prices have hurt the earnings of companies in all segments of the energy industry, the merger increasingly has seemed to be less of a good deal than initially thought.
Market players reacted to the news that the merger might be in trouble by bidding up Energy Transfer Equity's stock price. On Tuesday afternoon, the stock price closed at $10.33, up 48 cents or 4.87% from Tuesday's opening price.
An indication that the merger was not proceeding smoothly occurred earlier in April, when Williams filed two lawsuits in response to Energy Transfer Equity's private offering of Series A convertible preferred units, a move Williams contended would dilute the value of its ownership of the merged company.
Williams filed suit against Energy Transfer Equity in the Delaware Court of Chancery seeking to unwind the private offering and sued Energy Transfer Equity CEO Kelcy Warren in the district court of Dallas County, Texas, for tortious interference with the merger agreement.
Back in February, some analysts questioned whether the merger still made economic sense after Williams saw its stock price take a hit on speculation that Chesapeake Energy, a major customer of Williams, might be considering filing for bankruptcy protection.
The two companies agreed to merge last September in a deal valued at $37.7 billion just three months after Williams rejected an earlier takeover bid from Energy Transfer Equity as not being generous enough.
The merger would create the third largest energy company in North America and one of the five largest energy companies in the world, the companies said in a joint statement.
At the time of the merger announcement, which occurred on a Monday, the deal valued Williams at $43.50/share, a premium of 4.6% premium to Williams closing share price on the previous Friday.
However, since that formal merger announcement, the value of Energy Transfer Energy's stock has fallen about 69% and Williams' stock has dropped about 62%, US Capital Advisors analyst Becca Followill said in a report on Williams earlier this month.
Followill described the events surrounding the proposed merger as a "soap opera."
If the deal falls through, depending on the circumstances, each of the two companies could be on the hook to pay a termination fee, Followill noted.
"If [Williams] finds another suitor or the board changes its recommendation, they pay ETE $1.48 billion," she said. In addition, if Williams' shareholders vote down the deal, Williams will be required to pay Energy Transfer Equity up to $50 million of expenses.
However, if the merger does not close by September 28, assuming a 90-day extension due to US Federal Trade Commission rulings, Energy Transfer Equity pays Williams $410 million, she said.
"We think the deal does not and should not go through. Most likely, the breakup is a mutually agreeable one, with a cash sweetener from ETE of $1 billion-plus," Followill said.
