A Pipeline Super Merger Doomed from the Start

In September 2015, Energy Transfer Partners and Williams Companies, two of the largest energy pipeline companies in the country agreed to merge into a $38 billion powerhouse. Now, more than four years later, the midstream giants are in the midst of a protracted legal battle that began soon after the announcement. At the core of the legal dispute is a $1.5 billion breakup fee Williams Companies claim Energy Transfer Partner owes for not completing the merger. There are several key companies mentioned in this article; for simplicity, we’ll refer to Williams Companies as Williams and Energy Transfer Partners as Energy Transfer.

Back Story

At the time, Williams, led by CEO Alan Armstrong, was the fourth largest U.S. pipeline company, and Energy Transfer, run by Chairman Kelcy Warren, owned 35,000 miles of natural gas and natural gas liquids pipelines. In February 2014, Warren reached out to Armstrong about a possible merger. Williams was working through a series of deals, namely, the Access Midstream Partners acquisition for $6 billion, which would give Williams control over the largest gathering and processing MLP. “This is another big step toward our goal of becoming the leading natural gas infrastructure provider in North America,” said Armstrong. The Williams board agreed to allow Armstrong to continue the discussion with Warren. Finally, the two leaders met May 6, 2015, at Warren’s Dallas home to discuss the deal. Warren insisted on keeping the operating units as separately traded entities.

A week later, on May 13th, Williams announced it was buying the remaining shares of Williams Partners in a $13.8 billion stock for unit deal. The internal merger was poised to bring double-digit increases in share value and positive growth. “We couldn’t be more excited,” said Armstrong. The deal announcement did not mention the pending merger with Energy Transfer.

Eager to pursue the internal merger and not concede control of Williams to a rival, Armstrong pushed the internal merger through without mentioning to the board that the Energy Transfer deal would not move forward if the Williams Partners deal was approved.

Days later, Armstrong received a merger offer from Warren detailing Energy Transfer would acquire Williams in an all-equity transaction at $64 per share of Williams common stock. The closing of the merger was set for June 29, 2016. Soon after, Armstrong met with the Williams board of directors; however, at the meeting, several board members were confused about the development of the internal merger and what exactly Energy Transfer’s position was regarding Williams Partners.

Muddled Negotiations

Williams board members became increasingly concerned about inadequate information but, after a series of discussions over several days, announced on June 21, 2015, that Williams was rejecting the Energy Transfer offer. Nevertheless, Energy Transfer’s interest in Williams remained strong and the May 13th announcement of the internal merger forced an unsolicited bid. The next day, June 22nd, Energy Transfer, in an attempt to get the attention of the Williams board, issued a hostile takeover in a stock-for-stock bid valued at $53 billion including debt, further proof that Energy Transfer was eager to create a midstream powerhouse similar to its rival Kinder Morgan.

In a statement, Energy Transfer said:

“ETE is disappointed that, despite the best of intentions and its efforts to reach a friendly, negotiated combination, it is forced into a position to publicly confirm its offer for Williams. Unfortunately, until Williams’ announcement today, Williams’ management has inexplicably ignored ETE’s efforts to engage in a discussion with Williams regarding a transaction that presents a compelling value proposition for its stockholders. After the WPZ merger announcement, ETE believed that it had no other choice but to provide the detailed terms of its interest to the Williams Board. ETE did that and, for the last five weeks, it has been waiting to commence a constructive and open dialogue. Now that Williams has finally responded, ETE intends to engage with Williams to the extent that Williams undertakes a fair and even-handed process.”

Many in the investment community felt the Energy Transfer offer was generous, but Armstrong’s vision was now different, perhaps in an effort to keep Williams independent. “Energy Transfer’s bid ‘significantly undervalues’ the company and doesn’t deliver the same value as its pending acquisition of Williams Partners and standalone growth prospects,” Armstrong said.

In July 2015, Williams continued to insist on pursuing either the internal merger or consider being acquired by Energy Transfer. On behalf of the board, Armstrong issued a statement:

“Our Board and management team remain committed to acting in the best interests of shareholders, and in light of the unsolicited proposal, our Board believes it is in the best interest of shareholders to conduct a thorough evaluation of strategic alternatives.”

Despite the back and forth, Energy Transfer indicated the hostile takeover was still on the table.

Avalanche of Lawsuits

Houston Public Employees Pension System had investments in Williams and filed a lawsuit in July 2015 indicating the board had not conducted itself in the best interest of shareholders. The suit also claimed that Williams failed to publicly disclose Energy Transfer’s offer and the simultaneous decision to complete the internal merger, knowing that Energy Transfer insisted that the deal would not close if the internal merger continued. The suit further states that if the internal merger was the best option, the $410 million termination fee between Williams and Williams Partners did not make sense, other than to create a disincentive for Williams to sell itself to Energy Transfer. The pension system lawsuit argued that Armstrong had not told the board all the facts and, because of that, Williams pursued the internal merger to stop the hostile takeover.

In early 2016, a class action lawsuit was filed by investor Michael Erber asserting that the Energy Transfer deal should have been communicated better prior to the internal merger, and omissions on Armstrong’s part violated securities laws. He further indicated that the internal merger was inferior to the Energy Transfer deal and the market would have responded accordingly. The suit was eventually dismissed.

Williams had yet another legal battle in August 2016, this one with North American Polypropylene (NAPP) which sued Williams alleging that a deal between the two companies on a Canadian pipeline project was in fact not going to happen with the Energy Transfer merger in play. Because of Williams’s lack of transparency, NAPP was out $400 million.

Done Deal?

On September 28, 2015, Williams approved the $38 billion merger with Energy Transfer acquiring Williams Companies at $43.50 a share. The combined company would be the third largest in North America. At the same time, Williams announced it was terminating the internal merger with Williams Partners and agreed to pay the termination fee of $428 million. Initially, several board members opposed the deal along with Armstrong; however, a proxy fight ensued, and the next day board members were swayed to approve the merger in an 8-5 vote. At a subsequent townhall meeting, Armstrong told employees, “As much as we may want to throw a pity party for ourselves, it is not going to do any good, so I can tell you that. As much as I’d love to just get out there and wallow in the pity with you, that’s not my job as a leader, and it’s not where we need to be. We need to show what we’re made of and step up and be positive and move through this.”

Armstrong was determined to move on, although it seems halfheartedly, and he set out to change the deal’s direction by allegedly engaging with John Bumgarner, a former senior executive who retired in 2001 after serving 25 years at Williams. Armstrong shared more information about Energy Transfer with Bumgarner than he did with his own board. In November and December of 2015, Armstrong exchanged numerous emails with Bumgarner, who concluded that the Energy Transfer deal was not in the best interest of Williams and began to challenge the deal. In an attempt to conceal the communication, Armstrong communicated with Bumgarner from a Gmail account that he subsequently deleted a day after a deposition about the perilous Williams-Energy Transfer merger. Armstrong said he deleted the Gmail account because he was receiving a lot of spam. Bumgarner emailed Armstrong on December 6th requesting corrections to a document he was preparing to make a case for a lawsuit against Williams.

The next day, Armstrong met with Bumgarner to discuss the merits of the case he had against Williams. Bumgarner alleged that the Williams board was deceiving investors by stating the merger would provide $2 billion in commercial synergies, which were overstated and a violation of security laws. On December 14th, Bumgarner reached out to Armstrong via Gmail for further data and statistics and on December 17th copied Armstrong in an email he sent to his attorney about the lawsuit. Bumgarner filed lawsuits against Williams and Energy Transfer on January 14, 2016. His complaint in an Oklahoma federal court sought to halt the merger because of misrepresentations made by both companies. This latest lawsuit put the Williams board into another public quandary and it was forced to issue a press release supporting the merger. Bumgarner’s lawsuit was dismissed.

Energy Market Collapse

The energy market changed drastically in early 2016 with falling oil and natural gas prices. Williams and Energy Transfer shares had fallen by 60 percent, shedding a combined $37 billion in market capitalization. Energy Transfer was facing more debt than expected and reached out to Williams to restructure the deal. Williams refused to cooperate and found a breakup fee extracted from Energy Transfer more enticing at that moment.

Energy Transfer made attempts to keep the deal afloat by issuing public shares to boost the viability of the deal with shareholders, increase public trust, and maintain credit ratings. Williams refused to go along with several of those measures, which further chipped away at the prospect of closing the merger.

In March 2016, Energy Transfer issued a statement explaining the issuance of special shares:

The Plan reflects the Partnership’s broader strategy to be proactive in maintaining its credit rating and enhancing its liquidity position. The Partnership has presented the Plan to the credit rating agencies and has received favorable reactions from the agencies for the Plan. The Plan, together with other actions available to the Partnership, is designed to place the Partnership in the strongest possible financial position for 2016 and 2017.

On March 24th, Armstrong emailed his board to argue against moving forward with the merger and on April 6th, the Williams board sued Energy Transfer over the issuance of special stock.

Part of the complaint read:

“Williams has reviewed ETE’s private offering of convertible preferred units and concluded it is a breach of the merger agreement. Among other things, the offering provides select ETE investors with preferential treatment on ETE distributions.” It added, “Williams has commenced litigation to protect the interests of its stockholders. The litigation is intended to ensure that Williams’s stockholders will receive the consideration to which they are entitled under the merger agreement.”

Energy Transfer discovered that the deal would create a large tax liability under the changed market conditions. “It’s your worst nightmare. Your heart stops,” said Brad Whitehurst, Energy Transfer’s head of tax. The Williams-Energy Transfer deal structure included a condition that the merger transaction would be tax free and because Whitehurst could not issue a required 721 opinion attesting to an IRS tax free status by the merger closing date, the deal would not close. Williams filed another lawsuit asserting that Energy Transfer created a tax liability obstacle in order to walk away from the deal with no obligation to pay the $1.5 billion breakup fee. Energy Transfer issued a counterclaim and, through a flurry of communication, made several attempts to come to a solution that would be in the best interest of both companies.

“Before this most recent suit was filed, we reached out to Williams requesting such discussions. Williams has unfortunately taken steps to limit our communications with members of its board, and did not respond to our most recent request before filing its third lawsuit,” Warren said.

On June 24, 2016, the court ruled that Energy Transfer had the right to terminate its merger agreement with Williams. The same day, the Williams board recommended stockholders vote in favor of the merger agreement. Just a few days later, Williams filed an appeal to the June 24 ruling. Energy Transfer had enough and issued a statement June 29th terminating the merger agreement. Again, the same day, Williams issued a statement saying it rejected the court’s decision and would move ahead with the appeal and pursue the breakup fee.

Chaos at Williams

On June 30, 2016, in a closed-door meeting, six of Williams’s thirteen board members voted to remove Armstrong. They felt that he was not a fit to lead Williams as an independent company. Those six members strongly favored the Energy Transfer deal and subsequently quit because they were on the losing side of the other board members and Armstrong who worked against the merger.

In a resignation letter submitted by board member Keith Meister, he said, “There was discussion of the substantial business and operational failures that have occurred over the last five years on Alan’s watch as CEO, many of which I, Eric Mandelblatt or other directors have often raised in the past.” Meister went on to express how he felt about members who sided with Armstrong, “I can only conclude that those directors who were unwilling to support this change have acted more out of a personal loyalty to Alan Armstrong, rather than permitting the facts of his performance to take them to the correct answer.”

In a letter to the SEC, Mandelblatt expressed his concern that Armstrong was incapable of maximizing shareholder value and was only interested in keeping his role as CEO. “I cannot serve on a board that continues to empower a CEO with an abysmal operational and financial track record, and who, in my opinion, lacks the necessary judgment and character to lead the company forward,” Mandelblatt said.

A week after the June 30th board meeting, Bumgarner and Armstrong met for happy hour and Bumgarner followed up in an email detailing their team efforts the past six months.

Ongoing Litigation

Williams closed the merger with Williams Partners in August 2018. “We are pleased to close this important transaction following the strong support for the merger that was demonstrated by our shareholders in yesterday’s overwhelming vote of approval,” said Armstrong. “This transaction provides Williams with a simplified corporate structure and streamlined governance while maintaining investment-grade credit ratings, and positions us well for long-term growth and enhanced shareholder value. As a fast-growing, investment grade C-Corp with the best natural gas infrastructure assets in the sector, we are confident this combined entity will provide a compelling investment opportunity to a broader range of investors.”

The Institutional Shareholder Service in April recommended a cautionary “yes” vote for Armstrong’s continued service as a director and a “no” vote on Williams Chairman Stephen Bergstrom.

In a February 18, 2020, court brief, Energy Transfer, through a Bumgarner subpoena, details Armstrong’s efforts to scuttle the deal via secret emails. The brief further states that, “Litigation-focused communications between Armstrong and Bumgarner took place both before and after Bumgarner filed suit against Williams and ETE, and Armstrong never revealed the existence of these communications to the Williams Board, did not forward any of Bumgarner’s communications to internal or outside counsel, and never informed ETE of these communications.”

In a June 9, 2020, deposition Armstrong mentioned that most of his communication with Bumgarner was oral and he deleted his Gmail account because he was heavily attacked with all kinds of spam.

Bumgarner sang a similar tune the day Energy Transfer filed a counterclaim indicating Armstrong worked with Bumgarner to sabotage the merger deal. In an interview with The Dallas Morning News, Bumgarner said, “I don’t know what we were talking about. We worked together at the same company for a long time. I see him socially at the country club. I see him at United Way events. Tulsa is not a very big town.”

Merger deals that fail to materialize for a variety of reasons are a typical course of business with at least one party paying the breakup fee. However, the Delaware Supreme court agreed with the lower court that Energy Transfer was not in breach of the merger agreement and not required to pay the $1.5 billion breakup fee. However, there is still ongoing litigation. In March of this year, Williams argued that Energy Transfer should reimburse it for the $410 million breakup fee when it terminated the internal merger. In another case, the court will decide if Armstrong’s communication with Bumgarner was a breach of contract, which would release Energy Transfer from additional claims.

Despite the current crude price pressure as a result of OPEC+ and the coronavirus closing down the market, Williams and Energy Transfer are performing well and expected to thrive.

Note: Background information for the reporting of this article was provided by the Market Institute’s April 2020 report, Destined to Fail: How Desperation and Deception Scuttled the Energy Transfer/Williams Merger by Charles Sauer, President and Founder, the Market Institute.