Institutional Shareholder Services Inc. recommends that shareholders of Williams Companies (WMB) approve the pipeline company's $20.9 billion merger with Energy Transfer Equity (ETE) at a shareholder meeting later this month, if it matters.
The shareholder vote on the deal that was struck on June 22, 2015, is set for June 27. The termination date for the merger agreement is June 28. Energy Transfer, which is now an unwilling suitor, is not expected to extend the merger contract. The cash component that Energy Transfer offered to induce Williams to enter the merger has since, with declining energy pricing and greater business and debt risks, become a problem for the buyer.
The deal is also going to trial in Delaware Chancery Court on June 20 where that court will hear arguments from both sides about how each has allegedly failed to provide best efforts to get the deal completed.
The Federal Trade Commission has cleared the transaction, but closing the merger remains conditioned on a tax opinion that has become a major bone of contention for the deal.
But ISS, and proxy advisory Egan-Jones, have come out with recommendations that Williams shareholders vote in favor of the deal at the June 27 special meeting.
Given that the deal spread is $5.69, or 26.9%, with Williams trading at $22.16 and the cash and stock merger value at $27.85, the vote for may not need much persuasion.
The deal is largely a combination of gas pipeline and storage businesses and natural gas prices have fallen since the merger was announced and risks of reductions in Williams pipeline operations has risen. The cash component in the transaction has become increasingly burdensome for Energy Transfer, and is apparently a reason-or excuse-for the difficulty in getting the required tax opinion.
In its opinion, ISS said that "despite the additional strains brought on by a continued decline in commodity prices, [the merger] continues to offer a compelling strategic alternative for Williams shareholders: a significant cash component on closing, a more diversified customer base...and nearly half the equity in a combined company anticipated to have much stronger free cash flow-particularly as the oil and gas sector recovers-than Williams on a standalone basis."
As the merger parties head to Delaware, ISS notes that the contract itself, which provides for specific performance, has its own value.
"Had Energy Transfer negotiated a reverse termination fee, rather than agreeing to specific performance, we would already know a precise value. As a floor, shareholders might consider that Williams would have to pay a termination fee of $1.5 billion if the board changes its recommendation on the transaction. But the value may be significantly greater: the board's financial adviser, evaluating the economics Williams negotiated, peg it closer to $10 billion in the "has/gets" analysis of its fairness opinion. But the board itself appears to have underscored this point in its proxy statement by pointing out that, while not unanimous in approving the transaction nine months ago, it is nonetheless unanimously committed to enforcing Williams' rights under that contract," ISS writes.
The proxy adviser opines that "it is conceivable that a better alternative for Williams shareholders might be to convert some of the cash component into equity, at an exchange ratio which fairly compensates them for giving up the certainty of that cash, and substantially de-risk the balance sheet at the outset" It seems wiser to preserve the value of the contract itself, and the potential value creation opportunity of the combined company, by voting for the merger, ISS said.