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Expecting something better from Energy Transfer's Acquisition of Williams Inc?

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For months, Investors in Master Limited Partnerships have been warned that the market was ripe for Mergers and Acquisitions, where weaker units would be consolidated into a more credit worthy sponsor, leading to higher and more stable distribution growth.  The long awaited culmination to the Williams Inc strategic review came to a close Monday morning when Energy Transfer Equity announced that they were acquiring Williams through a fairly complicated transaction.  If you were looking to the news improving your fortunes, that did not happen, at least not yet.   Just being exposed to energy and debt was a reason to trade down today, but Energy Transfer, and Williams, were both sharply lower by the doubts assigned to the $2B of synergies and $5B of capital need to realize those annual synergies by 2020.   Not sure what the market was expecting other than a higher price, but it sure did not think much of this transaction, from either side of the table.  One item most people assumed correctly is that Williams Partners will be left as a stand alone LP.  Even this expected news sent WPZ lower -6.12% on 4x the average 90 day volume.  


Let's first explain the tax free transaction and then we will list the concerns expressed during the Q&A. The proposed deal, subject to Williams shareholder approval, expected to close by the second half of 2016, will first create a new C-Corp, which will trade under the ticker ETC,  designed to closely track the performance of ETE, which is structured as an MLP.   The ETC instrument is expected to appeal to a wider set of institutional investors, who otherwise would refrain from acquiring stakes in Master Limited Partners.  As a current Williams Inc shareholder, you will have the option to receive 1.8716 shares of the newly issued ETC for each WMB share owned, or a $8.00 and 1.5274 ETC shares, subject to a pro rated cash cap.


Williams Shareholders will also receive a special $0.10 dividend, payable immediately prior to the closing in mid 2016. Williams Inc will also be making a $428MM breakup payment to Williams Partners, which is expected to be distributed to unitholders likely as UBTI.   Once ETC is listed, the distribution of ETE (K-1 income)  will be identical to that of ETC (1099 Income), through 2018.  The ETC share will trade with a Contingent Consideration Right, which will ensure that there is no premium or discount between ETE and ETC during over the course of a two year period.  If a discount did exist under their calculation rules, a cash or equity payment will be made at the end of the measurement period.  



So here are some of the key points highlighted by Energy Transfer which are expected to benefit shareholders:


-  $2B of EBITDA Commercial synergies will be realized by 2020 on a run rate basis

-  $300-$400MM of Operating Cost synergies to be realized by 2017 on a run rate basis 

-  ETE on the path to investment grade credit rating

-  Investment Grade LP's will provide ETE with an increasing level of IDR payments.  


Below is the chart of how the LP's have performed over the past year, which illustrates the LP financing challenges for new asset drops.





On the Conference call, below are a number of concerning topics posed to Kelcy Warren and Jamie Welch



Synergies:  Q: What is your confidence in achieving the synergies and where may they be realized?    A:  Our confidence is very high as we have been working very closely with the Williams management team over the past several months...we expect a significant portton of the $2B to be realized in the Appalachian Northeast where there is a significant opportunity for Liquids capital efficiencies



Capital Expenditures:  Q Where will the $5B be spent and can you execute your plan in light of the capital markets? A: It will be mostly in the Northeast...yes, despite current volatility, we have a blueprint to execute through the end of 2016...WPZ also has a plan to ensure that projects are executed through 2016



Dilution:  Q Why was more cash not offered vs equity? A We spent alot of time with the rating agency and Williams and we did not want to put the credit rating at risk, further, our financing cost is much lower than our cost of equity, so we chose this plan



Credit Rating:  Q When will ETE realize investment grade credit? A:  2017 would be ideal if we execute



On Simplicity  Q  This transaction seems to make ETE more complex and suggests the parts are trading at a discount, are there any plans for simplicity?  A  We have seen a very steep decline in our sector, our view is that this is the best structure to move forward.  There is a large overhang in our sector, with much upside.  From Complication comes Value


With the market fixated on the expectation of lower production, tighter credit and a very narrow equity window, it may be a while before Energy Transfer trades in line with the synergies management has outlined, the majority of which will not be material until 2018.  










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