A battle of wits between US pipeline majors

New York: Energy Transfer Equity’s $51 billion bid for fellow pipeline company Williams has raised the prospect of a clash of business models, with the two groups at odds over the best structure for operating energy infrastructure in the US. (The offer, which would create the world’s largest energy infrastructure group, was on Sunday evening rejected by Williams as significantly undervaluing its business.)

However Williams, which operates pipelines for natural gas and related liquids in the US, left the door open to accepting a bid, saying it had launched a strategic review. Analysts suggested on Monday that given the limited number of potential buyers for Williams, Energy Transfer stood a good chance of being ultimately successful, perhaps after raising its offer.

The deal values Williams’ equity at about $46 billion, and it also has about $5 billion in debt. Kelcy Warren, Energy Transfer’s chairman, said on Sunday that he believed combining his group with Williams’ assets would “create substantial value that would not be realised otherwise”.

Energy Transfer added that it was “disappointed” that it had been forced to confirm its offer, and said Williams’ management had “inexplicably ignored” its attempts to discuss a deal, in spite of multiple attempts over the course of almost six months.

One fundamental strategic disagreement between the two companies is that Energy Transfer Equity and its affiliated companies are set up using a tax-advantaged structure known as a master limited partnership. Williams is a corporation and plans to consolidate its affiliated partnership into a single company.

MLP structures, which are used principally in the energy industry and especially for infrastructure such as pipelines, became increasingly popular over the past two decades because of their tax benefits, but have recently become controversial, in part because of their complexity.

Kinder Morgan, the largest US pipeline group, announced last August that it was consolidating its set of partnerships into a single company.

Williams said in May it planned a similar move, buying in the remainder of its 60 per cent owned MLP affiliate Williams Partners for $13.9 billion.

The Energy Transfer offer is conditional on Williams abandoning that deal. Williams’ shares have fallen since the consolidation plan was announced, losing about 4 per cent of their value by last Friday’s close.

By contrast the Energy Transfer group announced a restructuring in January, with Energy Transfer Partners buying its affiliate Regency Energy Partners in a $17 billion deal, but it will remain as an MLP, controlled by Energy Transfer Equity.

Under the Energy Transfer offer for Williams, a new company established as a conventional corporation called ETE Corp would be established and given a separate listing.

Williams investors would be given equity in that in return for their shares, but the Energy Transfer businesses and Williams Partners would remain as MLPs.

In its search for potential alternative buyers, analysts said that Williams would not have too many options because of its $45 billion market capitalisation.

Kinder Morgan and Enterprise Products Partners appear to present the only viable alternatives, according to Jay Hatfield, of InfraCap, portfolio manager of an exchange traded fund that invests in MLPs.

“In the past Energy Transfer has been very aggressive,” he said. “There’s a pretty reasonable chance that it will be ultimately successful.”

Warren has a reputation for coming out victorious in takeover battles. Energy Transfer battled Williams for control of Southern Union, another pipeline company, in 2011 and succeeded after raising its bid.

— Financial Times