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Energy Transfer wins $37bn Williams deal

The takeover will create a midstream powerhouse with a vast network of pipeline and processing facilities across the US

In the latest sign of how lower oil prices are reshaping the US energy landscape, Energy Transfer Equity  struck a deal worth $37.7bn with Williams Company in a takeover that will create a midstream powerhouse with a vast network of pipeline and processing facilities crisscrossing the US.

The deal brings to a close a months-long saga between the companies. In June, Williams rejected a $48bn offer from Energy Transfer, which is run by billionaire Kelcy Warren, that valued the company at $64 a share, saying at the time that it 'significantly undervalued the company.

That rejection prompted Williams' management to launch a strategic review and seek out other potential bidders. In the intervening months, however, conditions for the companies have deteriorated and the growth outlook dimmed, putting pressure on Williams to close a deal. The result is a scaled-back agreement that values Williams at $43.50/share, reflecting a slide in its stock price since June.

Williams shareholders will have the option to take shares in a new company called Energy Transfer Corporation (ETC) or cash or a combination of the two. ETC will be formed as a complex and unique blend of a C-Corp and Master Limited Partnership aimed at lowering taxes on the new company and attracting a wider base of institutional investors that have not so far embraced the Master Limited Partnerships that have become common among pipeline companies.

Investors weren't sold on the deal, though. Both companies' share prices fell sharply on the news, with Williams' share price dropping to around $37/share, well below the value of Energy Transfer's offer.

But the companies defended the deal. Wiliiams' chairman Alan Armstrong said that after the company's strategic review, which included talks with other potential partners, the deal was 'in the best interest' of the company's shareholders. Energy Transfer said the deal would deliver more than $2bn in saving from synergies through 2020 and provide more cash flow to fund growth opportunities. The merged companies would have $5bn in growth projects over the next five years, Energy Transfer said in a presentation.

Together, the companies would create a pipeline operator of unprecedented size. The company would control 104,000 miles of pipelines linking the country's largest shale plays as well as the Gulf Coast and other refining and storage bases. Crucially for Energy Transfer, it would be acquiring Williams' strong position in the Marcellus shale in the northeast, where production continues to grow strongly and pipelines are only now starting link it to the rest of the country. More than 32bn ft3 of natural gas would flow through its network every day, around half of the US' total consumption.

Booming oil and gas production from areas such as North Dakota and Pennsylvania that had previously seen little development has created huge growth opportunities for the US' energy infrastructure builders. Dozens of new pipeline and processing facilities will be starting up over the next year around the Marcellus shale alone.

But as oil prices stay lower and exploration and production companies slash spending and production plans, the prospects for continued growth are dimming. "Midstream energy companies have already built much of the infrastructure necessary to accommodate growth in US shale by E&P companies", Andy Brooks, a senior analyst at the credit rating agency Moodys, said last month.

That has pushed pipeline companies to start looking to mergers and acquisitions for growth. The Energy Transfer deal is likely to spur further acquisitions as others try to keep up with the company's dramatically expanded scale, particularly from Kinder Morgan, its largest competitor.

Energy Transfer will be the largest energy infrastructure company in the US and one of the largest energy companies in the world after the deal. It estimates its post-agreement enterprise value will be around $149bn, behind just ExxonMobil, PetroChina, Shell and Chevron.

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