Editor’s Note: This story was reported as part of a partnership between The Frontier and NewsOn6. See the NewsOn6 version of this story here.
Even at its lowest point, in 2002 when its stock dropped below $1 per share, The Williams Companies Inc. maintained its high expectations of corporate citizenship.
That year the company was on the brink of bankruptcy and needed an emergency, high-interest loan from Warren Buffett just to stay afloat. Keith Bailey had just retired then from his job as CEO of the Tulsa-based energy company.
“ I was probably most proud of the company the year the stock had dropped below $1 for a time. … In spite of the fact that there were public questions as to the survivability of the company, it was in crisis, Williams was again a $1 million dollar-plus donor to the Tulsa Area United Way,” Bailey said in an interview with The Frontier and our media partner, NewsOn6.
The company is at a crossroads again with the pending merger between Williams and Energy Transfer Equity LP, or ETE, an energy company based in Dallas. ETE and its related entities own and operate more than 70,000 miles of pipelines.
Since the merger was announced, questions have surfaced about how and why the Williams board approved it and whether the companies can close the deal given current conditions in the energy industry.
At least eight lawsuits have been filed in Delaware and Oklahoma trying to stop the deal, which the suits claim is based on faulty assumptions that could shortchange Williams’ stockholders and, by extension, Tulsa should the deal occur,
The companies announced the transaction valued at $37 billion on Sept. 28, 2015. Under the terms, a newly created affiliate of ETE called Energy Transfer Corp. (ETC) would acquire The Williams Companies Inc., paying shareholders a combination of cash and common shares of the new company.
The merger, if approved by Williams shareholders and the federal government, would create North America’s third-largest energy company.
Tulsa-based financial adviser Keith Goddard, CEO of Capital Advisors Inc., said he believes Williams shareholders “are now being asked to accept a junior security with two-year training wheels” that is eventually going to “trade like the inferior security it is.”
One way to determine whether a proposed transaction between two publicly held companies is a good one is to watch the stock value. On the day the merger was announced in September, Williams stock dropped 12 percent.
“That told me that the market didn’t believe that this was really going to be a good transaction for Williams,” Bailey said.
In May, the Williams board voted to acquire Williams Partners (WPZ), a related entity also based in Tulsa, in a $13 billion transaction. The company said the deal would simplify its corporate structure and increase cash flow.
In contrast to the day the ETE merger was announced, Williams stock increased 6 percent per share that day.
Terms of the ETE merger, however, required Williams to abandon that plan, which cost the company a $400 million “breakup fee.”
Goddard has produced an 18-page report for investors that calls the Williams merger with ETE “highly unusual” because the company’s shareholders aren’t expected to receive much of a premium — the amount a stock sells for above its value — in return for sale of the company.
Records show the average energy industry transactions pay shareholders a premium of about 24 percent while Williams shareholders would receive a 4.6 percent premium in the merger. Those figures were reported by a financial adviser working on the Williams merger.
Also, the transaction includes mechanisms to support the stock and dividends through 2018. The newly formed company agrees that its shareholders receive the same cash dividend as shareholders in ETE.
Projections of the merger’s value take this linkage into account, which Goddard and investor lawsuits have called misleading. After 2018, when the new company’s stock is not linked to ETE, investors could lose value, he said.
The transaction also has no built-in protection or floor to shield Williams shareholders if ETE’s stock declines steeply.
Apparently, the financial markets share the skepticism of the Williams-ETE merger.
Between when the deal was announced on Sept. 28 and Jan. 13, ETE stock declined in value 65 percent. At that price, the “implied value” of the stock to Williams’ shareholders is just $15.41 per share.
While the stock price has recovered some recently, the value of the deal is still far less than what the Williams board already turned down.
In May, ETE offered Williams a transaction worth an estimated $64 per share. The board of Williams rejected that proposal because it “significantly undervalued the company.”
One selling point of the proposed merger was that it would strengthen Williams’ credit rating, enabling it continued access to scarce capital for ongoing energy projects and expansion.
However both companies “have now had their credit downgraded to below investment grade and the stocks have collapsed for both of them,” Bailey said.
Bailey is a Williams shareholder and no longer a decision maker with access to inside information. But he believes the proposed merger with ETE promises benefits that are “either not achievable or grossly mischaracterized.”
“I think what they intend would be the efficiency savings — which you do always get in terms of whole corporation mergers — are really overblown.”
Williams’ press release announcing the deal claimed that it was expected to produce $2 billion in earnings from “anticipated commercial synergies” by 2020.
In a lawsuit filed in Tulsa’s Northern District of Federal Court last month, a former Williams executive cites this claim as one of several alleged misstatements by Williams and ETE. The lawsuit by John Bumgarner, who held various leadership roles within Williams for 25 years, seeks class-action status for shareholders
His suit alleges that the assumptions that led to the $2 billion figure are overstated and include factual errors.
“One or more of Williams’ and ETE’s executive officers, and one or more of the directors on Williams’ strategic review committee, had actual knowledge that the press release and investor publication contained false or misleading statements … and that the statement in each concerning $2 billion in synergies was false,” Bumgarner’s lawsuit states.
Because the merger was based on an implied stock price that has since declined dramatically, it’s unclear whether ETE can come up with the $6 billion needed to close the deal.
“I think there are fair questions to be raised about whether they even have, or will have, the financial capacity to close the transaction that has been agreed to,” Bailey said.
“If they do, will that so weaken the combined company that they won’t have the capital capacity to pursue the projects they talked about as being the benefit of the transaction?”
Votes changed after dinner
Williams has taken steps to reassure investors and others that the company is financially sound and still committed to the merger with ETE.
On Jan. 15, in response to “market speculation,” Williams issued a press release stating that the company’s board “is unanimously committed to completing the transaction.”
However as several investor lawsuits point out, the Williams board was not unanimous in its support for ETE’s offer when it originally voted.
The board first voted on the current transaction on Sept. 24 and it failed to gain enough support, with seven out of 13 directors voting no, according to an investor lawsuit filed in Delaware. Those voting against the proposed merger included Williams CEO Alan Armstrong.
Instead of informing ETE of its decision, however, the board decided to recess the meeting until the next day. The recess was to give board members “an opportunity to reflect further upon the strategic alternatives review process and the potential alternatives,” the lawsuit states.
Board members broke into two groups for “dinner meetings” and met the next day, the lawsuit says.
“Although the proxy provides no detail as to what discussion occurred in the interim, the board voted again, and by this time, by an eight-to-five vote, the board authorized” Williams’ management and its financial advisers to finalize terms of the transaction, states the suit.
The Delaware lawsuit names all 13 members of the Williams board along with ETE and related companies, as well as two companies providing financial services.
The suit notes that two board members who voted for the merger lead “activist investor funds” that bought about 9 percent of Williams’ stock in 2014. Keith Meister and Eric Mandelblatt stand to make $237 million and $186 million respectively on their investments in Williams, the Delaware lawsuit states.
Meister and Mandelblatt had conflicts of interest that should have prevented them from voting, and that would have left the proposal short of a majority approval, the suit states.
Other board members may have been concerned about lawsuits and possibly losing a lucrative director’s position if the board did not approve the merger, the lawsuit says. Williams directors are paid between $200,000 and $600,000 each year, but receive other compensation as well.
The Delaware lawsuit states: “In light of the previous meeting and two impending suits against the board, the board apparently got the impression that their jobs hinged on selling the company to ETE.”
In fact, several weeks before the vote, board members discussed “possible actions that ETE or Williams stockholders could take if the board rejected ETE’s current offer.”
The lawsuit is among six suits filed against one or both companies in Delaware’s Chancery Court seeking to stop the transaction. While investor lawsuits are not unusual against publicly held companies involved in large transactions, experts say the type of allegations in the Williams investor suits are unusual.
Egos and empire building
With the combined assets of Williams and ETE, the new company created by the merger would transport 35 percent of the country’s natural gas, 15 percent of its crude oil as well as exporting 15 percent of the country’s liquified natural gas.
The company’s billionaire founder, Kelcy Warren, started ETE in 1995 and the company has grown rapidly, mostly through acquisitions and mergers.
Warren is ranked No. 86 on Forbes’ list of the 100 richest Americans, with an estimated net worth of $2.3 billion. Warren paid $30 million for a home in Dallas, equipped with a “secret music studio accessed via a trick shoe-rack in a walk-in closet,” according to D Magazine.
He also paid $45 million for a ranch in Colorado and, at least in 2009, owned an island in Honduras where he entertained rock bands. A music lover, Warren founded Music Road Records in Austin, which produces music for singer-songwriters.
Goddard said Warren “is known for being aggressive and having a large ego.”
In presentations and releases, ETE has emphasized the size and scope of the new company once it combines with Williams.
“I think there’s definitely an element of empire building here,” Goddard said. “The early lines of this are all about how big we’re going to be and how great our map looks. ETE is acquiring a better business model to help strengthen their business model.”
While the merger, if approved, may strengthen ETE’s business model, it would likely have a negative impact on Tulsa in the form of job cuts.
Williams employs more than 7,000 people and about 800 of them are based in the Tulsa headquarters. Most of those employees are highly paid corporate executives and the loss of those jobs would have a deep impact on Tulsa in many ways.
In a letter to employees when the merger was announced, Armstrong said: “ETE recognizes Williams’ historical presence in and dedication to the Tulsa community, and ETE will maintain a meaningful presence in Tulsa.”
Goddard and others who have studied the transaction point out there’s no way that can be true, at least not compared to current levels of employment.
Annual operating costs at Williams Partners are about $530 million “and they are talking about cutting $400 million,” he said. “The presence in Tulsa will be miniscule.”
Company’s ‘amazing legacy’
Mayor Dewey Bartlett said Williams’ departure from Tulsa would be “a very bad day for the community.”
Bartlett said it was cousins Joe and John Williams who helped keep downtown Tulsa alive in the 1970s and 1980s, setting the city up for the explosion of growth it is now experiencing.
Not only would individuals lose their livelihoods and the city suffer a major blow to its economy, Bartlett said, but the community would be poorer because it could be without many employees who for years have given back to the city.
“We would lose that commitment that employees have toward their community,” Bartlett said.
Mark R. Graham, president and CEO of Tulsa Area United Way, said Williams is consistently among the top contributors to the organization.
“They have an amazing legacy, generously contributing more than $1 million annually for the last 25 years,” he said.
In the last 26 years, the company has donated more than $50 million to the Tulsa Area United Way. Last year, 350 employees volunteered for the United Way’s annual Day of Caring — more than any other local company or organization.
Williams spokesman Tom Droege said the company and its employees donated more than $7 million to various organizations in Oklahoma last year.
That kind of corporate citizen would be missed, said Brent Ortolani, vice president of marketing for the Tulsa Area United Way.
“Losing them would be a blow, there is no question about it,” Ortolani said. “But we hope for the best and we hope they will be with us for a while.”
However, former Mayor Kathy Taylor said she believes even if the merger is approved, Williams will continue its Tulsa ties. She said she expects that a significant number Williams employees will be retained in Tulsa after the company changes ownership.
Williams’ lasting legacy goes beyond jobs, Taylor said, as the company has played a major role in supporting the arts and encouraging workforce diversity.
“I think that the impact both from an economical and — if you will — a cultural standpoint in Tulsa of The Williams Companies will be here for a long time,” she said.
Frontier Senior Staff Writer Kevin Canfield contributed to this story.