is selling one of its most stable businesses to some established bargain hunters.
In an effort to trim its huge debt load and further narrow its business focus, Williams is parting with its profitable master limited partnership. Williams expects to collect $512 million in cash and wipe out another $570 million in debt by selling its 55% stake in the
Williams Energy Group
partnership to a group of private investors best known for leveraged buyouts and other high-yield plays.
If the deal closes next month as planned, the partnership will be controlled by a new company equally owned by Madison Dearborn Partners and the Carlyle/Riverstone Global Energy and Power Fund. The principals at Carlyle, in particular, have made a name for themselves as leveraged buyout artists with deep experience in the investment banking arena.
Karl Miller, a former energy executive who leads a similar buyout firm, points to the newest Williams deal as a sign of things to come.
"This is a good example of how private equity/LBO funds can bridge the inefficient capital markets gap, conduct legitimate commerce and capture significant value for their respective investors," Miller said.
Miller has no such confidence in the management at Williams or other merchant players, however.
"This is purely a legacy of Williams' failed business strategy," he said of the latest sale. "Williams, like many power and gas merchants, continues to sell assets as a core strategy to stay afloat."
Shedding a Tear
By selling its stake in the partnership, Williams will shed a business that throws off profits of roughly $100 million a year. It will also end nearly four decades in the oil transportation business, leaving it entirely focused on the production, processing and delivery of natural gas.
"This agreement moves us closer to wrapping up major asset sales and rounding out what Williams will look like in the near future," Williams CEO Steve Malcolm said.
This year, Williams has arranged a string of asset sales expected to generate $2.6 billion in cash and shave the company's $12 billion debt load by around $1 billion. Williams has been particularly busy this month, announcing a big $1.05 billion gas transmission sale just ahead of the partnership transaction.
Tulsa money manager Fredric E. Russell said Williams is clearly preparing for its upcoming meeting with Warren Buffett, the noted value investor who offered Williams a lifeboat as it swam close to bankruptcy last year. Buffett provided Williams with a high-priced financing package that comes due this summer.
"Buffett should have some mixed feelings about this," said Russell, whose firm lost money by investing in Williams last year. "He'd like to see his cash, but the deal was collateralized by some wonderful assets.
"He was probably hoping for a default, but he's not going to get it."
Following the recent string of asset sales, Russell said, Williams should escape any real threat of bankruptcy for at least another year. But Russell still views the partnership sale as bittersweet, since the asset had always thrown off some nice cash flow.
Williams Energy Partners owns a 6,700-mile pipeline, 39 related storage terminals, an ammonia pipeline and 40 marine and inland terminals. It will now be managed by a group of energy and banking professionals with better access to the capital needed to fund future growth.
Together, Madison Dearborn and Carlyle/Riverstone have nearly $24 billion worth of assets under management.
"We look forward to assisting WEG in identifying and financing accretive acquisition opportunities through our extensive energy industry relationships," said Pierre Lapeyre, managing director of Carlyle/Riverstone.
Lapeyre is one of three former Goldman Sachs energy bankers leading the new venture. Goldman has a rare track record of success in the difficult merchant sector.
Peter Cohan, the author of several popular investment books, said the former Goldman bankers appear to be snatching up a real bargain right now.
"We're starting to see all these value buyers come in and make acquisitions," Cohan said. "That basically tells me that these private equity investors are getting in at low prices.
"This does not look like a great deal for Williams."
The market disagreed, however. News of the asset sale sent Williams rocketing above $6 for the first time since liquidity fears overtook the stock last summer. Shares of Williams had jumped 7.3% to $6.33 by midday. Shares of Williams' partnership remained unchanged at $39.