For investors in Williams Companies (NYSE:WMB), Friday was a bad day for a reason other than Brexit. A Delaware court ruled that Energy Transfer Equity (NYSE:ETE) will be able to get out of its deal to acquire Williams, due to concerns about how the deal will be taxed. This should substantially affect Williams shareholders as the deal was made when energy prices were much higher, and Williams wanted to force the deal in order to help maximize shareholder value. Without the deal, however, Williams will still be fine and has a few paths forward.
It is not a secret that Energy Transfer wanted out of the deal. When they made the merger agreement with Williams, energy prices were high and there was the projection for large synergies between both companies. Now with the substantial drop in prices, Energy is facing a cash crunch caused partially by the cash portion of the deal. Energy has offered previously to renegotiate the deal with Williams, as they were hoping that Williams shareholders would accept more stock compensation instead of cash. However, Williams has refused to budge. While a court usually doesn't allow a company to get out of a merger that it doesn't like, in this case there was a specific question before the court.Williams Partners is doing just that, trying to push for the merger. First, the company announced in a press release that a majority of its shareholders have voted to approve the merger:
The agreement between Williams and Energy contained a provision that would essentially let Energy walk away from the deal if the tax structure on the deal was not what Energy thought that it would be. While this is usually a routine matter, Energy's counsel refused to issue a letter addressing the merger as tax free. As a result, Energy has cited the tax issue as the reason that it wants out of the deal. Importantly for Williams, there is a $1.48 billion breakup fee should Energy back out of the deal.
The court ruled that Energy's lawyers were acting in good faith in their belief that the tax structure was not as initially thought tax free. While Williams leaned heavily on the argument that this is just a ploy by Energy's attorneys to help Energy get out of a deal that it now regrets, the court found the issue differently. While it may look suspicious, there is very little evidence that this is the case, and it does appear as though this is an issue where Energy's attorneys found a problem in the deal structure, and were acting in good faith. Williams is expected to continue to try to do everything that it can in order to help make the merger go through at its current terms.
As previously announced, the cash and stock elections will be subject to proration and adjustment procedures that are further described in the merger agreement between Williams and ETE (the “Merger Agreement”). Subject to those proration and adjustment procedures in the Merger Agreement, common stockholders of Williams had the option to elect to receive for each share of Williams common stock (other than Williams shares held by Williams, subsidiaries of Williams, Energy Transfer Corp LP (“ETC”) and its affiliates and shares for which the holder thereof has perfected appraisal rights under Delaware law) the right to: $8.00 in cash and 1.5274 common shares representing limited partner interests in ETC (“ETC Common Shares”) (the “Mixed Consideration”); or 1.8716 in ETC Common Shares (the “Share Consideration”); or $43.50 in cash (the “Cash Consideration”).
Based on the information as of the election deadline, 5:00 p.m., Eastern Time, on June 24, 2016 (the “Election Deadline”), the preliminary merger consideration election results were as follows:
* Holders of 22,447,733.992 shares of Williams common stock, or approximately 2.859% of the outstanding shares of Williams common stock, elected to receive the Mixed Consideration;
* Holders of 25,222,476.625 shares of Williams common stock, or approximately 3.212% of the outstanding shares of Williams common stock, elected to receive the Share Consideration;
* Holders of 489,030,749.927 shares of Williams common stock, or approximately 62.291% of the outstanding shares of Williams common stock, elected to receive the Cash Consideration; and
* Holders of 248,375,417.456 shares of Williams common stock, or approximately 31.637% of the outstanding shares of Williams common stock, failed to make a valid election prior to the Election Deadline.Williams also issued another release announcing its intentions to fight the court ruling:
Williams today also filed papers commencing an appeal in the Delaware Supreme Court of the Delaware Court of Chancery’s June 24, 2016 ruling relating to the Merger Agreement between Williams and ETE. While Williams appreciates the Court of Chancery’s consideration of this matter, Williams does not believe ETE has a right to terminate the Merger Agreement because ETE has breached the Merger Agreement by failing to cooperate and use necessary efforts to satisfy the conditions to closing, including delivery of Latham & Watkins LLP’s Section 721(a) tax opinion. Williams remains ready, willing and able to close the merger under the Merger Agreement entered into with ETE on September 28, 2015. If ETE terminates the Merger Agreement, Williams will take appropriate actions to enforce its rights under the Merger Agreement and deliver benefits to Williams’ stockholders.
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