5% Dividend & A Catalyst With Williams Partners
Deal Target Description
Williams Partners L.P. (NYSE:WPZ) is a midstream natural gas master limited partnership. It yields over 5%.
Deal Terms
On May 13, 2015, Williams (NYSE:WMB) and the eponymous Williams Partners (WPZ) announced a deal in which WMB will buy WPZ at a fixed exchange ratio of 1.115 WMB shares for each WPZ public unit. The deal is subject to regulatory filings and the approval of WMB shareholders and written consent from WPZ holders.
Deal Financing
The deal is not conditioned upon receiving any financing. WMB is working with Lazard (NYSE:LAZ) and Barclays (NYSE:BCS) on the deal.
Deal Conditions
The deal is subject to regulatory filings and the approval of WMB shareholders and written consent from WPZ holders.
Deal Price
As of today, the deal premium has been almost completely taken out of the WPZ market price.
This offers investors the opportunity to buy a high yield MLP with some non-zero chance of a catalyst if they are able to reconstruct a deal.
Deal Alternatives
On June 22, 2015, Energy Transfer Equity (NYSE:ETE) offered to buy WMB. WMB shareholders would get 0.9358 ETE shares for each WMB share. ETE's offer is conditioned on walking away from the WMB-WPZ deal.
Deal Rationale
This deal was probably a defensive move to complicate the advances from ETE. There is little additional rationale for the WMB-WPZ deal. The deal was announced immediately after the Access Midstream deal closed without enough time to integrate that company. Also, last year WMB management explicitly emphasized their intention to be a pure-play general partner, contrary to this move. None of the deal's $2.1 billion in cash tax savings can be used for several years.
Deal Probability
The probability that this deal is successfully consummated is less than 50%. WMB shareholders are enthusiastic about a deal with ETE. ETE is expected to bump their offer, making a deal all the more likely. ETE-WMB is just a matter of price. All of the other deal characteristics are acceptable. Two hedge funds, Corvex and Sorban, have WMB board seats from which they can ensure that the company maximizes shareholder value. It would be reasonable to expect them to support a ETE-WMB deal at the right price. Even if ETE is not able to buy WMB, WMB said that they are evaluating strategic alternatives. In such a process, Enbridge (NYSE:ENB), TransCanada (NYSE:TRP), Spectra (NYSE:SE), Plains (NYSE:PAA), Kinder Morgan (NYSE:KMI) and Enterprise Products (NYSE:EPD) are all potential bidders for WMB.
Event Driven Investing with Equity Options
It is reasonably likely that the current series of corporate transactions will be sorted out by the end of the year. One can write December 18, 2015 $50 WPZ puts which last traded at $5 with a bid of $3.40 and an ask of $5.00. Regardless of the deal's resolution, these are likely to be profitable to write. These will breakeven at most at $46.60 which is beneath the $47.40 that the units were worth before the deal.
Hedge
A short position on the Daily Natural Gas Related Bull 3x Shares (NYSEARCA:GASL) is one hedge worth considering. The December 18, 2015 $25 GASL calls last traded at $5.15, with a bid of $4.20 and an ask of $6.90. One can write a modest sized position of these contracts in order to take out some of the natural gas exposure in WPZ.
Conclusion
Even with a low probability of getting acquired by WMB right away, WPZ is a good long opportunity relative to its market price.
Disclosure: I am/we are long WMB, WPZ.
Chris DeMuth Jr is a portfolio manager at Rangeley Capital. ...
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