April 6, 2016 / 2:02 PM / a year ago

UPDATE 3-Williams sues ETE and CEO Warren over share offering

(Adds Energy Transfer response, shareholder quote, background)

By Michael Erman and Mike Stone

April 6 (Reuters) - Williams Companies Inc sued Energy Transfer Equity LP and its Chief Executive Kelcy Warren on Wednesday, claiming they violated the U.S. pipeline companies' merger agreement by making a private preferred share offering to ETE's top investors.

Williams argued that the offering in March, which prompted a public rift between the companies, was designed to siphon money to Warren and away from Williams and ETE shareholders.

"Warren devised the special offering as a means to shield his own personal financial interests in ETE - namely, the distributions he stands to receive from ETE on his ETE common units - from the economic uncertainty that has been facing ETE in recent months," Williams said in a lawsuit filed in a Texas district court.

Another Williams lawsuit filed against ETE on Wednesday, in the Delaware Court of Chancery, remains under seal.

Williams, based in Tulsa, Oklahoma, said in a statement it was committed to the nearly $14 billion deal and hoped to hold a stockholder vote to close it as soon as possible.

The offering at the center of the lawsuit effectively protects Warren and other top shareholders from a cut in distributions by ETE, a master limited partnership.

The offering to top investors, which ETE said would help it pay down debt from the merger, would provide convertible units in exchange for a temporary cut in distributions. These investors would eventually receive equity in exchange for the convertible units even if other ETE shareholders had their distributions reduced.

Energy Transfer said in a filing with the Securities and Exchange Commission that it would vigorously defend itself against the lawsuits. It said it believes that it has complied, and intends to comply, with its obligations under the merger agreement.

Dallas billionaire Warren is ETE's largest shareholder and controls the company through its general partner. He received more than $200 million in distributions from the company over the last year.

He set his sights on Williams last year in order to transform his empire into one of the biggest pipeline networks in the world but the timing was poor. A prolonged drop in oil and gas prices has made the deal more difficult to finance and to justify to shareholders.

ETE would need to take on a heavy debt load to fund the $6 billion cash portion of the deal. Williams said in the Texas lawsuit that ETE has looked into how it might be able to walk away from the merger even though the terms do not allow that.

ETE has also fired its chief financial officer and slashed projections for cost savings from the Williams tie-up, making investors highly skeptical about whether the deal would close.

"The news stream around this deal over the last several months has not been constructive," Quinn Kiley, managing director at Advisory Research Inc, which owned around 9 million ETE shares and 3.7 million Williams shares as of the end of 2015. "It's hurt holders on either side, and created a negative spin cycle."

Williams shareholders, who will receive mostly ETE stock for their shares if the deal is completed, have yet to vote on the deal.

ETE said in March it had originally intended to offer the preferred units to all of its shareholders, but Williams did not consent to a public offering. ETE said it did not ask Williams for its consent on the private offering.

Shareholders including Warren, who hold around 31.5 percent of Energy Transfer's units, participated in the offering and agreed to take smaller distributions for up to nine quarters.

Other shareholders participating in the offering include Energy Transfer's President Jon McReynolds and Chief Commercial Officer Marshall "Mackie" McCrea, according to SEC filings.

Shares of Williams rose 68 cents, or 4.6 percent, at $15.49, while ETE shares rose 49 cents, or 7.6 percent, to $6.94.

Additional reporting by Tom Hals in Delaware and Amrutha Gayathri in Bengaluru; Editing by Meredith Mazzilli and Richard Chang

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