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June 24, 2011

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Week Thoughts: WMB Makes it Rain

Mid-week Bernank comments, followed by weak unemployment claims figures, plus the ongoing Greek issues the stock market down hard towards the end of the week.  Signs of weakening economy and the release of strategic petroleum reserves pushed crude oil prices, and therefore most energy companies down.  One of the few bright spots was the MLP sector, which rose almost 3% week over week, with many MLPs recovering the losses from last week’s intense MLP selling.

Not sure the reason why MLPs outperformed, maybe it’s MLP institutions trying to finish the quarter strong, pushing up the sector, maybe it’s a flight to quality and an acknowledgement that MLPs are a safe place to get some yield when treasuries are sub-3%, maybe they were just oversold.

The biggest news story of the week was that the Southern Union Company (“SUG”) party was crashed by the Williams Companies (“WMB”).  Energy Transfer Equity (“ETE”) management and SUG management had worked out a nice little deal.  ETE would pay a decent price, and SUG management would get a really big, really golden parachute for signing up to that price.  WMB called SUG and ETE on it, offering $39.00 per share cash, as opposed to ETE’s confusing $33.00-ish value in equity.  In the words of Randy Moss, they said, we’ll buy SUG with “Straight cash, homey.” Read more details about it here (Financial Times) here (, here ( blog), and here ( blog).

People talk about the NFL labor issues as millionaires arguing with billionaires, in the case of the drama unfolding around Southern Union Company, its billionaires on almost all sides.  Here is a graphic display of some of the personalities involved.  Kelcy Warren, Carl Icahn and Michael Cannon (the original MLP banker), doesn’t get more interesting than that.  Carl Icahn is wearing shades because (like most deals) he wins no matter who buys the company.  Same with Lindemann and the slew of merger arbitrage funds that bought SUG last week.

If WMB does win the deal, unitholders of WPZ also win, because it would mean the drop-down party is not yet over…here is a picture of me with former WMB CEO Steven Malcolm in August 2005 at the NYSE right before the first day of trading for WPZ, after we priced the deal well above the range (been looking for any excuse to post that picture)… He and the rest of the WPZ unitholders will likely have similar smiles if they win the deal for SUG.

Steve Malcolm and Hinds at NYSE on the first day of trading for WPZ
WPZ’s yield (around 5.5%) is a real advantage for WMB compared with the yield of ETP (around 7.5%) and RGNC (around 6.9%), because Williams Corp will be able to sell assets to itself (WPZ) at higher prices than ETE will be able to sell assets to itself (ETP/RGNC).  Therefore, WMB will be able to see more accretion over time.  Both WMB and ETE are no strangers to the financial engineering required to really make money with the MLP structure, but it seems like WMB holds most of the cards in this one.  The one thing ETE is hanging its hat on is the desire of SUG unitholders to have a tax-efficient transaction.   But that tax efficiency goes away pretty fast when the assets get dropped down into ETP and RGNC, unless they have some more tax tricks up their sleeve.
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. Long ETP and RGNC.

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