Shares of Williams Cos. (WMB - Get Report) fell 3% in morning trading to $20.62 per share after a Delaware judge ruled on Friday that its buyer Energy Transfer Equity (ETE) could walk away from the deal because of unfavorable tax consequences.
The stock of ETE, meanwhile, rose 6% to $14.66 per unit.
Williams said Sunday it was committed to closing the deal and would go forward with the shareholder vote today, even though the ruling effectively killed the deal as a favorable tax treatment was one of its closing conditions. The transaction was set to close tomorrow.
"While we appreciate the court's consideration of this matter, Williams does not believe ETE has a right to terminate the merger agreement because ETE has breached the merger agreement by failing to cooperate and use necessary efforts to satisfy the conditions to closing, including delivery of Latham & Watkins LLP's Section 721(a) tax opinion," Williams said in a statement. "If ETE attempts to terminate the merger agreement, Williams will take appropriate actions to enforce its rights under the merger agreement and deliver its benefits to Williams' stockholders."
Analysts at Tudor, Pickering, Holt & Co. wrote in a note Monday that without the tax opinion, a closing condition won't be satisfied by tomorrow's outside closing date and the deal will die. "Ironically, the vote outcome will likely be a point for future litigation rather than having any impact on the merger itself," they said.
Jefferies & Co. analyst Christopher Sighinolfi said in a report that other items remain unsettled, including uncertainty regarding whether Williams will pursue damages relating to ETE's March issuance of Series A units and whether ETE will unwind the Series A issuance given that its leverage concerns are likely reduced without the merger's cash requirements.
The analyst also noted uncertainty about the magnitude of a dividend reduction Williams had threatened if the deal didn't close -- he's been modeling a cut to 34 cents per quarter from 64 cents -- and whether a cut is done in connection with incentive distribution rights waiver support to affiliate Williams Partners (WPZ) or as a result of a reduction in WPZ's distribution (he expects IDR support).
Despite an expectation for lower near-term payouts, Sighinolfi thinks that ETE and WMB hold upside, with both stocks trading at discounts to their peers. He has both names as a buy with a price target of $17 for ETE and a price target of $27 for WMB.
There's market talk that going forward Williams could resurrect its purchase of Williams Partners, which was announced in May 2015 for $13.8 billion but cancelled after it agreed to be acquired by ETE. But analysts at bond research firm CreditSights doubt it, as they believe the resulting debt would threaten its investment grade rating and that the transaction was done simply to fend off ETE's advances.
In the Delaware case, Williams used Sandra Goldstein, Antony Ryan and Kevin Orsini of Cravath, Swaine & Moore LLP in New York and Kenneth Nachbar of Morris, Nichols, Arsht & Tunnell LLP in Wilmington. ETE retained Michael Holmes, John Wander and Michael Charlson of Vinson & Elkins LLP in Houston and Rolin Bissell of Young Conaway Stargatt & Taylor LLP in Wilmington.
For the merger, Williams took financial advice from Barclays' Gary Posternak and Barbara Byrne and Lazard Ltd.'s Albert Garner and Doug Fordyce. For legal advice Williams tapped a Cravath team led by Minh Van Ngo and Richard Hall with Andrew Needham and Christopher Fargo on tax and a Gibson, Dunn & Crutcher LLP team led by Steven Talley, Eduardo Gallardo and Robyn Zolman with Eric Sloan on tax.
Energy Transfer's outside legal advisers were led by Wachtell, Lipton, Rosen & Katz' David Katz, David Lam and Alison Preiss with T. Eiko Stange on tax. Latham & Watkins was special tax counsel with Laurence Stern and Tim Fenn leading that effort. Bill Finnegan, Ryan Maierson and Mark Gerstein also worked on the deal. William McKee and William Nelson of Morgan, Lewis & Bockius LLP also provided tax advice to ETE.
Some of the information for this article originally appeared in The Deal, a sister publication of TheStreet.com focused on deals and dealmakers, on June 24. For more information about The Deal click here.