My two cents, is that the current $7 price is not reasonable. The headlines are sensational, Warren may be trying to get a no vote on the deal, don't think it happens. If it goes through, probably a dist cut, not a bad thing. Compared it to KMI which has stabilized and moving up after cutting div 75%. The two cos have similar debt levels. ETE should be $12 to $15 based on the comparison to KMI.
That's close, add the $6 billion, debt/ebitda post merger would be 5.8x, dropping to 5.2x in '18, which is about where KMI will be. Looks like the LPs can cover dist's. Would guess assets will be sold to lower the debt. ETE should be $12 to $15 if it gets the same value as KMI. Seems DCF multiple of 10x is conservative, $1.26 this year gets you $12 plus. I think there is a possibility that the merger noise and headlines are dampening price. Today, still seems the institutional investors will vote yes even with Warren's noise, if that is what he is doing. After the merger, he has to make it work, his value is tied up with ETE value.
Only a guess, once the merger is done, the assets will be one company, he can't punish one group over another. The stock plan for employees will use ETC security, which is what WMB holders get and is tied to ETE, there is the make up for a two year period. I suspect the stock plan was just trying to throw something negative out there, they could authorize a plan and use it over period of years. He will need the institutional investors after the merger, and anything he does affects the current ETE holders, of which he is the largest holder, although the conv pref gave him more protection. This is a mess. I think both stocks are suffering because of the Warren actions, but today still think it goes through. I don't think the WMB Board will do anything. Could be surprised. WMB could cut the div to a dollar and with a 4% div, would sell at $25. Same magnitude with ETE. Seems those negatives are already in the stocks and more. Warren could be setting it up to merge and cut the div, the stock would go up. Hard to tell. WMB may be better off with the deal but not so sure. The CHK issue looms but CHK could last a couple of years of low prices before they have consider bk, the market was almost assuming it would happen soon, not so. Too many pieces, but bottom line, is both are undervalued, ETE $15 and WMB $25. Cancel the deal and everyone wins short term and figures it out long term. Comm prices are coming back last half of the year.
I think your assessment is right. It is clear in the investment community that Warren wants out of the deal and pursuing "scorched earth" strategy, have heard that several times. The future for both cos is not as bad as is being imagined. Most don't think the WMB board will do anything, kind of dysfunctional, so we wait until June. In the meantime, no good news spin from ETE and WMB can't do anything to risk paying the penalty. If we get through April and oil starts to firm further in May, this could be a help for the stocks. Most now think oil will be $60 by end of year. After the last year and a half, I'm not sure why anyone could think they can forecast price moves in commodities. Do think ETE and WMB are $15 and $25 values but the deal will keep their stock prices down. If a mutual termination of the deal, both up. Hard to be a long term investor right now.
One issue of being short now is if this deal is called off, ETE could jump a couple of dollars right away. Doesn't seem a good short opp especially with commodity prices improving.
Warren controls the GP of ETE, not much can be done by inst investors. Backing up from the neg headlines which are manufactured by Warren to get a no vote, the values are much higher than the stock prices. Using 10x DCF for both, you are looking at $13 ETE price, a double and $26 for WMB, 70% above the current price. That seems about right. A 10x multiple assumes no growth in either entities. A 12x multiple which is more reasonable when commodity prices get back to the $60/$3 range, $16 for ETE and $30 for WMB. If you had the stomach for headlines that are wrong and a faith in commodity prices coming back. Volumes are the key and the breakeven price for e and p s keeps getting lower so we could have a bunch of vol growth at $50 to $60 sustained price. Still think we will look back at this as an extreme value opp. You have to look forward and no back. The synergy no of $2 billion was based on spending another $5 billion or whatever, wasn't really cost synergies, that's in the neighborhood of $400mm, 10x gets you a $4 billion addl value, not a small no. Problem is Warren believes now his ETE is more valuable stand alone than combined, would agree with that but they are both undervalued because of the deal.
I have given that some thought, wondered about PSX, they could do it. But beyond that, there aren't many big players, guess a major could do it but don't see that, a utility. Just looked at a chart on the Dist Cash Flow history, in the summer of 14, General Partners were selling for 40x DCF, ETE is now selling for 5x DCF, the average back to 09 has been 21x. Even the universe of LPs was sold for 13x DCF historically. You could make great case for the extreme values of ETE now. But you have to put up with the noise of the next couple of months. KMI is selling for 9x DCF after the div cut and ETE is selling for 5x. Too much of a difference. Most investors never get beyond the headlines and emotions and the financial press thrives on sensational headlines. WMB value assuming a 15x DCF for ETE, not 40x or 20x, would be high $30s. A 10x multiple on ETE's next year's DCF gets you mid $30s. Hold you nose and buy. But most won't.
Another thought the $1.5 billion penalty is $2 per share, that doesn't seem like such a big deal for a buyer like PSX that has almost no debt and is an almost $50 billion market cap co. Have always thought PSX would be the best merger partner.
Gartman is useless, just read that and thought that makes no sense whatsoever. The move to electrics probably is more of a risk.
That won't get you out. Most feel the merger is best for WMB now. Except Warren doesn't want it and is trying to scare a no vote. And the WMB probably feels they have less chance of being sued now by doing nothing. Overturning it has risk as well. The WMB Board voted 8 to 5 originally. This is a mess but if you believe there is value either with the merger or not, buy both stocks and hold on. You double your money by the end of next year.
Warren would love to accuse WMB of scuttling the deal and sue them for the $1.5 billion. That's why I don't think the WMB board does a thing. Could be surprised. Does seem that in the current environment, calling it off makes sense. Both cos will do well when shale growth picks up.
Am convinced that the values for ETE and WMB are depressed by not jut the deal uncertainty but more so by Warren's attempt to undermine it. Fire your CFO that orchestrated it, give yourself con pref shares that insulate you from a dist cut, offer a new equity plan that supposedly dilutes owners. Not very subtle. Will see if it works, and if it doesn't go through, he unravels everything and makes ETE work for the next few years. If he falis, also makes it work but WMB owners probably get more out of it than the ETE standalone owners would get. Not sure he's the kind of partner you want to have long term, but if you are aligned with his ownership, you probably do alright. And in the meantime, you have to wait two more months. And in the meantime, WMB will have another div declaration after an earnings report, that should be interesting.
Will read it, seems the news flow is changing to positive. Just read the CHK SA piece on the Scoop, Stack plays, breakevens in $30s. CHK bk is a long ways off. Sell some assets and they will have a couple of years for comm prices to rebound. I think the CHK issue was overplayed. Lots of gurus see strong oil price last half of year. Also LNG seems to be taking a hit, wonder if ETE could sell the LNG project, think there would be a ready buyer. Another article positive on KMI, ETE is cheaper that KMI on an ebitda basis and the debt is about the same. Again, things are turning pos for the sector. IMO, KMI deserting the MLP form turned the sector upside down, but the cash flows in an MLP should get higher multiples than a c corp in more normal times.
Am guessing that the only way it happens is WMB owners vote it down. Don't think it happens as of today but who knows. Warren has certainly done his best to put the worst spin on the merged co. Don't think it is that bad and once gets control of the assets, seems he has to make it work. If he did offer $2 billion as was floated, WMB should take it and run. The whole sector is irrationally priced imo and this deal make ETE and WMB even more so. Rising commodity prices would help a bunch.
Breach of contract, this is a big deal. You wanted the Board to do the right thing, seems they are. The deal is dead. And Warren may have to pay.
Warren doesn't want the deal. I don't know how and when this is resolved. WMB doesn't want to pay the $1.5 billion penalty but did the right thing with regard to the conv pref offering. Best thing for both cos would be to terminate the deal. At this point, I want to believe that Warren over played his hand with the conv pref'd. There are probably a hundred lawyers on each side analyzing the next move. But suing for breach of contract, seems they wouldn't have done it without really good justification. They floated the $2 billion payment before, seems that would a great resolution for WMB. Warren doesn't want the deal, will see how much he ponies up to end it.
This could be litigated for months. The deal is dead, a matter of how much ETE has to pay for breach of contract.
WMB is a $20s value without the deal. ETE would probably appreciate more. WMB should extract something from ETE to get out. $2 billion sounds about right.