June 22, 2015 / 8:31 PM / 4 years ago

Energy Transfer offer may be Williams' best option -analysts

HOUSTON, June 22 (Reuters) - Energy Transfer Equity’s unsolicited $48 billion offer for Williams Companies Inc through a corporate structure with tax advantages may be the U.S. pipeline company’s best option as potential bids from rivals are complicated by possible antitrust issues and the deal’s rich price, investors and analysts said on Monday.

Energy’s proposed all-equity offer of $64 per share for Williams was rejected by Williams’ board who said in a statement on Sunday that it significantly undervalued the company which controls a master limited partnership, or MLP.

Deals in the energy sector, especially oil and gas pipeline and processing companies, are turning to a more traditional corporate structure as MLP advantages wane over time. Energy Transfer would be the latest MLP to propose using a c-corporation as a way to maximize tax advantages, increase cash flows and broaden institutional interest.

The sector embraces the MLP structure because the tax burden is passed through to investors who receive fat yields. Because the partnership pays no taxes, it has a lower cost of capital.

Kinder Morgan Inc last year put all of its publicly traded partnerships into one corporate parent to quell concerns that it had grown too large and complicated.

As a partnership grows larger over time, it is frequently required to pay more income to its parent company, a situation that saps its ability to expand and raises the cost of capital. Energy Transfer will still hold a number of MLPs as part of its proposed deal.

Kinder Morgan Inc and Enterprise Products Partners, two other pipeline and processing companies, are large enough to make a bid for Williams, analysts said.

“There’s not really that many companies in this universe, in midstream, that have the facility to (bid for Williams), said Brandon Blossman, an analyst at energy-focused investment bank Tudor, Pickering, Holt & Co. “Kinder Morgan has very similar sort of assets in the mid-Atlantic and North East. Enterprise Partners has historically not shown much interest in large deals, like this.”

It would not make sense for Kinder to pay a premium for assets that it would have to turn around and sell, said Quinn Kiley, a managing director at large MLP investor Advisory Research Inc.

Additionally, Energy Transfer’s bid for Williams could rise to around $70 per share, a price that would likely knock out potential bids from Kinder Morgan or Enterprise, analysts at Credit Suisse said in a note to clients.

A spokesman for Kinder Morgan declined to comment. A spokesman for Enterprise Products Partners declined to comment.

Williams already has its own plan to acquire its Williams Partners MLP in a $14 billion deal that is expected to close in the fall..

The proposed Energy Transfer deal requires that Williams’ own deal would be scuttled, the Dallas company said in release late on Sunday. Williams said it is committed to moving its plan forward as its board looks at all strategic options.

The offer drove shares of Williams up 24 percent on Monday to $60. Williams is a major pipeline operator in the Marcellus and Utica shale plays in the Northeastern U.S. and has operations in other shale fields in Texas and Louisiana.

DEAL STRUCTURE

ETE Corp, the newly created entity that aims to acquire Williams in a tax-free deal, offers Williams shareholders the possibility of higher dividends and cash flow diversification, according to Energy Transfer.

Stakeholders in Energy Transfer Equity will benefit with an immediate boost to the cash flows paid out to investors, the Dallas-based company said.

“Not only does the structure of the deal maximize the tax advantage of the acquisition for Energy Transfer Equity, but also we believe that both cost and commercial synergies could be substantial,” analysts at Raymond James said in a note to clients on Monday.

Williams’ proposal to go it alone might not offer the best value to its investors, said Kiley.

“The proposed transaction (with Energy Transfer) is going to provide them with some synergies and provide them with some cost reductions,” said Kiley. “Whether or not they can deliver the same value over the near term like this offer does is up for debate,” he said. (Additional reporting by Kristen Hays in Houston and Kanika Sikka and Sneha Banerjee in Bengaluru; Editing by Bernard Orr)

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