By Liz Hoffman and Alison Sider
Kelcy Warren became a billionaire oil man by making deal after
deal, including purchases of thousands of miles of pipelines after
Enron Corp. collapsed. Now he is suffering from a severe case of
buyer's remorse.
As low oil prices spread pain throughout the energy industry,
Energy Transfer Equity LP, the Dallas company where Mr. Warren is
chairman, is scrambling to restructure or escape a $33 billion
agreement announced just seven months ago to acquire Williams Cos.,
based in Tulsa, Okla. The deal would create a 100,000-mile network
of pipelines.
Mr. Warren, 60 years old, has overseen a series of moves that
could torpedo the biggest acquisition of his life, such as an
unusual convertible preferred share issue that would dilute
Williams shareholders and increase his own stake in the combined
company.
When Williams Chairman Frank MacInnis called in February to
complain, Mr. Warren responded curtly, according to Mr. MacInnis.
"No one was going to tell him how to run his company," Mr. MacInnis
said in the unredacted version of a court filing reviewed by The
Wall Street Journal. The comment is crossed out of a publicly
available copy of the filing.
Energy Transfer disputes the comment but says the two men have
talked a number of times about what would be in the best interest
of shareholders. The company says Mr. Warren isn't trying to kill
the deal but is emphatic that it needs to be restructured.
The deal, one of the largest announced in 2015, is now in danger
of becoming one of the highest-profile corporate casualties of the
oil bust. After Messrs. Warren and MacInnis announced the agreement
on Sept. 28, oil prices fell about 40%, though they have since
rebounded. The share prices of both companies are still down by
roughly half. The tumult also cost Energy Transfer's chief
financial officer his job.
The mess shows how vulnerable many deals are to souring
financial markets. Deals touted as mutually beneficial when
announced can quickly turn better for one side than the other. The
same thing happened when credit dried up in the financial crisis
and droves of buyers scrambled to get out of deals.
So far this year, about $378 billion in U.S. mergers and
acquisitions have been abandoned, more than 40% higher than in all
of 2015, according to Dealogic. This year's broken-deal total will
be a record even if no more deals fall apart.
Recent examples include Pfizer Inc.'s proposed $150 billion
takeover of fellow drugmaker Allergan PLC and the $35 billion
merger of oil-field services companies Halliburton Inc. and Baker
Hughes Inc., which crumbled under pressure from U.S. regulators.
Honeywell International Inc. and Canadian Pacific Railway Ltd.
walked away from reluctant takeover targets.
Williams has filed lawsuits against Energy Transfer and Mr.
Warren over the share issuance, alleging that it cheats Williams
shareholders.
After initially resisting the deal, Williams now is considering
asking a judge to force Energy Transfer to complete the takeover,
say people familiar with the matter. Williams says a failed deal
would cost its shareholders $10 billion in lost value.
Mr. Warren has long kept a tight grip on his sprawling pipeline
empire, launched two decades ago. In addition to Energy Transfer,
he essentially controls three other publicly traded companies
stitched together so complicatedly that some analysts decline to
follow them, they say.
He also is one of the country's richest men, with a net worth
estimated at $7 billion by Forbes. Mr. Warren owns a private island
in Honduras and an 8,000-acre property near Cherokee, Texas, that
was once an exotic-animal ranch and is still home to roving zebras
and buffalo.
His 23,000-square-foot Dallas mansion, bought for $30 million in
2009, includes a bowling alley and a baseball diamond that features
a scoreboard with "Warren" as one of the teams.
He is an avid music fan and owns an independent recording studio
that produced in 2014 a Jackson Browne tribute album with cover
songs by musicians such as Bonnie Raitt and Don Henley.
Mr. Warren has boasted of seeing opportunity in downturns. He
launched Energy Transfer in the wake of Enron's demise and then
expanded.
In 2012, another company he runs, Energy Transfer Partners,
agreed to buy Sunoco Inc. for $5.3 billion while Sunoco was in the
middle of a complex restructuring. The $5.7 billion takeover of
pipeline company Southern Union Co., also in 2012, came after a
hostile bidding war.
In 2013, he hired Jamie Welch, a longtime energy investment
banker at Credit Suisse Group AG who shared Mr. Warren's hearty
appetite for deals.
The two men saw an opening in the oil rout that started in 2014,
which Mr. Welch described as "a once-in-a-lifetime
opportunity."
During a brief uptick in oil prices early last year, Mr. Warren
told analysts: "This is going to sound odd to you, almost sadistic,
but I was disappointed to see a rebound in crude prices...I was
excited to see who might be more vulnerable if we saw this market
continue a downward trend."
Energy Transfer set its sights on Williams and its crown jewel:
the 10,000-mile Transco gas pipeline. But Williams stiff-armed
Energy Transfer for months, according to securities filings.
When Energy Transfer made an all-stock offer in June then valued
at $48 billion, Williams rejected it as too cheap and plowed ahead
with plans to absorb an affiliate.
By the fall, Williams's outlook had worsened. In addition to
sapping pipeline demand, oil's slide had hurt Williams's
gas-processing business, which is especially vulnerable to price
swings. A big customer, Chesapeake Energy Corp., looked
increasingly troubled, too.
At a meeting of Williams's board of directors in Tulsa in
September, the company's advisers said investors were losing
patience, according to people familiar with the matter.
Hopes briefly flickered for a white-knight transaction with
Warren Buffett-backed MidAmerican Energy Co., which expressed
last-minute interest, but talks went nowhere, some of the people
say.
Energy Transfer kept pushing for a deal, but the Williams board
was divided seven to six against it. With tensions running high,
the group took a break for dinner. Unable to find a private dining
room big enough to accommodate them, they split into two groups,
one "for" and the other "against," people familiar with the matter
say.
When the meeting reconvened in the morning, two directors had
changed their minds. The deal was approved by an 8-5 vote.
Energy Transfer shareholders, who had bid up the stock price
when the offer first surfaced, were unimpressed with the details of
the takeover announcement. Energy Transfer shares fell 13% in one
day.
Early signs that regret was setting in came when Mr. Welch,
Energy Transfer's finance chief, painted the deal unfavorably in
conversations with some Williams shareholders in January. He even
suggested that they consider voting against it, these people
say.
The merger contract is written with unusually tight provisions
on how Energy Transfer can get out of the deal. Williams
shareholders can vote it down.
Word of Mr. Welch's efforts, which were earlier reported by the
New York Times, filtered back to Williams. Integration meetings
were postponed and progress slowed, people familiar with the matter
say.
Energy Transfer's public statements about the deal got
noticeably cooler. In March, the company slashed its estimate of
annual cost savings at the combined companies by more than 90%,
said it would suspend cash distributions for at least two years and
warned that a credit-rating downgrade was possible because of the
combined companies' heavy debt load.
Energy Transfer also backed away from its promise to keep a
major presence in Williams's hometown of Tulsa after the deal is
completed.
Last month, Energy Transfer said its lawyers couldn't guarantee
the transaction would be tax-free to Williams investors, a
condition of the merger's completion. Williams disputes Energy
Transfer's legal position and says it is an attempt by Energy
Transfer to wriggle out of the deal.
On an earnings call last week, Mr. Warren was dour about the
takeover. "Absent a substantial restructuring of this transaction,
which Energy Transfer has been very willing and actually desiring
to do -- absent that, we don't have a deal," he said. Mr. Warren
declined to comment for this article.
One big sticking point is the $6 billion cash portion of the
deal, or $8 a share. Energy Transfer and some analysts are worried
that the cash payout would saddle the combined company with too
much debt.
"Kelcy is firing every bullet he has," says Benjamin Michaud, an
analyst at asset manager H.M. Payson & Co., which owns $10
million of Williams shares and supports the takeover. "But from the
standpoint of a Williams shareholder, $8 [a share] is very
significant."
Some Williams shareholders say there is so much acrimony between
the two companies that it is hard to imagine them getting along if
the deal goes through. "There's got to be a lot of bad feelings on
both sides of the aisle," says Jay Rhame, a portfolio manager at
Reaves Asset Management.
Tulsa Mayor Dewey Bartlett Jr. says that he sees nothing good
about the proposed takeover and that he recently told Mr. MacInnis
that in a meeting in New York. Mr. MacInnis declined to comment for
this article.
The biggest flashpoint is the convertible-share issuance. In
March, Energy Transfer insiders, including Mr. Warren, President
John McReynolds and two directors, swapped their existing shares
for special units, which would forgo cash distributions over the
next nine quarters.
Those units are convertible into regular shares at a discount to
the market price, giving their holders a bigger stake than they
started with.
Energy Transfer has said the move would save $518 million to
help pay down debt. The company says it wanted to offer the shares
to all its investors, but Williams withheld its consent. Williams
says it opposed the move because it would hurt Williams
shareholders.
In April, Energy Transfer said it intended to suspend cash
distributions after the merger, meaning the insiders will have
given up nothing but still stand to receive more equity when the
units are converted in 2018.
People familiar with the matter say Mr. Welch disagreed about
how far Energy Transfer could go to try to get out of the takeover
and balked at the convertible-share issuance. The finance chief
told Mr. Warren the share issuance would damage Energy Transfer's
reputation on Wall Street. He also told his boss that he wouldn't
publicly defend the move, these people say.
That was the last straw in a relationship that already had
become troubled. The cash portion of the deal terms was Mr. Welch's
idea, according to people familiar with the matter. He had argued
that by including more cash, Energy Transfer could issue less stock
and keep more of the upside of the combined company.
But as the industry's outlook worsened and investors grew
concerned about the combined company's debt load, what seemed like
a win for Energy Transfer became a liability.
Mr. Warren ordered Mr. Welch's firing, according to people
familiar with the matter. The company announced Feb. 5 that he had
been replaced.
Mr. Welch has sued Energy Transfer for compensation he says he
is owed by the company. Mr. Welch has said his termination was
"motivated by an agenda unrelated" to his performance as chief
financial officer.
Mr. Warren told analysts that "the decision was made by me that
we needed to make a move, and we did."
Last month, Williams filed one lawsuit in Delaware seeking to
undo the convertible preferred share issue and another in Texas
alleging that Mr. Warren interfered with the deal. Energy Transfer
responded with a countersuit and says Williams breached the merger
agreement by refusing to give its consent for the shares to be
offered to all investors.
Unless the companies reach a surprise settlement, the deal's
fate will likely be decided by a judge in Delaware. A court hearing
is scheduled for mid-June.
(END) Dow Jones Newswires
May 10, 2016 14:24 ET (18:24 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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