Energy Transfer Equity, the US pipelines group, on Friday won a court ruling allowing it to walk away from its agreed takeover of Williams, another pipeline company.
The move gives it an escape route from a deal it had pursued vigorously last year, but had come to see as unattractive because of the turmoil in the energy industry.
A judge in a state court in Delaware, where Williams is registered, ruled that the company could not force ETE to go through with the takeover, because it had failed to demonstrate that its prospective buyer had not made “commercially reasonable efforts” to complete the deal.
The court ruling was closely watched by dealmakers across the US, as it will provide a blueprint for companies with buyer’s remorse to get out of a deal where the valuation of the target has significantly changed.
The decision, which followed a two-day hearing earlier in the week, is the latest twist in an unusually complex and acrimonious dispute between the two companies. ETE’s deal-driven growth strategy has foundered as investors have worried that pipeline businesses, which had been depicted as relatively safe investments with stable earnings, were vulnerable to the fallout from the slump in oil prices.
ETE, led by billionaire founder Kelcy Warren, approached Williams about a takeover a year ago, and after initially being rejected in September agreed a deal then valued at $34bn to create one of the largest gas pipeline companies in the US.
Since then, the value of ETE’s units, which it has instead of shares, has dropped 40 per cent, while Williams’ shares have dropped 49 per cent.
The judge in the case observed that because the price offered for Williams had been in cash, which ETE would have to borrow secured on its devalued assets, “the proposed transaction quickly became financially unpalatable” to ETE.
The judge added that it had become clear that ETE “desired an exit from the merger agreement as strongly as it had desired to enter the agreement in the first place”.
Drop in value of ETE’s units since September
The deal had a complex structure that meant it was unclear what tax would have to be paid. After the deal was announced, ETE’s lawyer, Latham & Watkins, said it could not provide an opinion that the transaction would be tax free, which is a mandatory condition to successfully complete a deal in the US.
Williams argued that ETE had breached its contractual obligations by failing to use “commercially reasonable efforts” to secure the opinion from the law firm.
However, the judge ruled that Latham & Watkins “could not in good faith opine that tax authorities should treat the specific exchange in question as tax free”, and Williams had failed to demonstrate that ETE had not done all it should have done to secure that opinion.
The court’s decision to allow ETE to terminate its merger with Williams will add to the record number of deals that have collapsed since the beginning of the year.
According to Thomson Reuters, more than $525bn worth of announced transactions have been killed since the start of the year. Several companies have either walked away from deals because of regulatory reasons or because of a change in the value of the target following a sharp drop in valuations.