June 24, 2016 / 8:35 PM / 3 years ago

Court says ETE can walk away from $20 billion Williams takeover

NEW YORK/WILMINGTON, Del. (Reuters) - Energy Transfer Equity ETE.N won a court ruling on Friday that would allow the pipeline operator to walk away from its more than $20 billion takeover of rival Williams Cos Inc (WMB.N), a deal that Energy Transfer agreed to in September but soured on in January.

A Delaware judge ruled that Energy Transfer, or ETE, had not breached the merger agreement when in March it cited a tax problem that would prevent the deal from closing by the agreed upon termination date. Under the terms of the deal, if the deal is not completed by June 28, ETE can walk away without penalty.

Williams said in a statement that it disagreed with the judge’s ruling and will take “appropriate actions to enforce its right.” It said in a brief filed with the court earlier this week that it would appeal any ruling in favor of ETE.

Williams’ shareholders are set to vote on Monday - a day before the deal’s deadline. The company said its board still recommends shareholders vote for the deal.

The two companies sued each other in Delaware Chancery Court in May after months of heated disagreement. ETE had been trying to back out of a deal that had become less attractive in the wake of oil price fluctuations and a decline in its share price.

ETE argues that it is not able to close the deal because its tax advisers at Latham & Watkins could not determine that the deal would be tax-free, as anticipated when the agreement was originally signed.

Delaware Vice Chancellor Sam Glasscock ruled that it was not material whether or not Energy Transfer and its chief executive, Dallas billionaire Kelcy Warren, had been trying to break the deal because he was persuaded that the tax issues uncovered by ETE were valid.

“If a man formerly desperate for cash and without prospects is suddenly flush, that may arouse our suspicions. Nonetheless, even a desperate man can be an honest winner of the lottery,” Glasscock wrote in a 59-page opinion.

Energy Transfer units were up over 8 percent in after-the-bell trading following the ruling. Williams shares fell more than 6 percent.

BURDENSOME DEAL

It is rare for judges to decide that a merger contract is unenforceable, said Brian Quinn, a professor at Boston College Law School.

“Buyers don’t get to walk often. In 2008, during the crisis, a rash of buyers tried to walk, but the courts wouldn’t let them,” Quinn said.

He noted that the chief justice of Delaware’s Supreme Court, which would hear any appeal filed by Williams, ordered Tyson Foods Inc to buy rival IBP Inc in 2001 after Tyson tried to back out of that deal.

“If I were Williams I would be quoting that opinion liberally” in an appeal, Quinn said.

Energy Transfer’s Warren set his sights on Williams last year to transform ETE into one of the world’s biggest pipeline networks. He launched an unsolicited bid last June and reached a deal in late September that was then worth $33 billion.

The timing was poor. Oil and gas prices dropped significantly after the deal was announced, the companies’ shares fell sharply and investors started to worry that the $6 billion cash portion of the deal would saddle ETE with too much debt.

ETE made it clear that it no longer believed the deal was attractive. It slashed estimates for expected cost savings and said it would likely have to cut distributions to shareholders entirely next year if it had to complete the deal. It also said it would have to cut jobs substantially in Williams’ home state of Oklahoma.

The company also launched a convertible share offering that effectively shields Warren and other top ETE shareholders from a distribution cut.

Reporting by Michael Erman and Tom Hals in Wilmington; Additional reporting by Mike Stone in New York; Editing by Dan Grebler and Leslie Adler

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