If a soap opera were based on a corporate merger and needed a script, the story of energy firms Energy Transfer Equity (ETE) and Williams Companies (WMB) - Get Reportwould make for a sure hit. And within this drama is a once-in-a-lifetime investment opportunity.
The merger has been engulfed in drama for months, with Energy Transfer trying to court Williams and painting a picture of the combined entity becoming the world's largest energy infrastructure company.
However, the two have faced intense opposition, even from within their own companies, with the latest round of twists and turns threatening to be the last straw.
Here is why the courtship between the two may not end in marriage and why it may make Energy Transfer a great investment play.
The deal initially made a lot of sense, because Energy Transfer expected to reap synergistic savings of more than $2 billion after making estimated investments of $5 billion into the integration process.
However, some external factors have drastically brought down that figure to an abysmal $170 million.
For starters, the tumble in oil prices completely destroyed Energy Transfer's estimates. The company had expected oil to cross $50 a barrel in the months following the transaction's announcement.
Instead, oil crashed this year, taking prices below $30 a barrel. With major oil-producing countries refusing to come to a consensus on restricting oil production so as to prop up prices, it may be a while before Energy Transfer's expectation on prices and thus synergies is met.
The deal between the two is a cash and equity deal. Under this kind of merger, Williams shareholders would get $8 a share in cash, while the rest of the $43.50 merger consideration would be paid through equity from Energy Transfer Corp., a new company.
This transaction was supposed to be tax-free for Williams shareholders.
However, according to a Securities and Exchange Commission filing, Energy Transfer is still to obtain a "721 tax opinion'" from its lawyers that would establish the stock portion of the deal is tax-free. And now, lawyers have already made it clear to Energy Transfer that they wouldn't be able to provide an opinion if the deal was closing on the present date.
The cash component of the deal has its own set of problems. To foot the cash portion of the deal, Energy Transfer was taking on an incremental $6 billion via a short-term bank loan that needed to be paid in two years.
With oil prices sinking and resulting debt downgrades coming down heavily on the sector, Energy Transfer had to come up with a solution to lower its debt burden.
In its bargain to pare its debt through the issuance of convertible preferred units to some investors through a private offering, Energy Transfer instead attracted the ire of Williams and a lawsuit.
In exchange for the issued units, holders would forgo their distributions for up to nine quarters that would help Energy Transfer retain cash and lower its debt. Williams was apparently miffed that this offering was only extended to Energy Transfer's investors and not its own, displaying preferential treatment to the former and safeguarding them from a future distribution cut.
Terming it as a breach of the merger agreement, Williams has taken Energy Transfer to court. For the merger to see the light of day, this suit will first need to be settled.
With the merger riddled with so many problems and both sides clearly wanting out without explicitly saying it, it is natural that the stock prices would bear the brunt.
Over the past year, both stocks have lost more than 60%, partly due to the grim energy scenario and partly due to the uncertainty clouding the merger. That is why Energy Transfer looks like a rare bargain-priced growth investment.
Even if the merger doesn't go through, both companies can continue to operate successfully on a standalone basis.
Williams will likely see higher demand for natural gas, owing to lower prices and leverage it to revive its financial strength. Also, both companies will benefit from contract renegotiations with oil major Chesapeake Energy after it has resolved its near-term liquidity concerns.
Add to this the fact there would be immense savings on integration and legal costs and the possibility of no termination fees for either party, and it seems as if Energy Transfer and Williams are better off without each other.
Energy Transfer is the stronger play. With its stock trading at above $11, the median one-year analyst price target doesn't call for any upside but on the high end it is $21, which would represent a gain of nearly 51%.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.