Oil Bust Gives Billionaire Deal-Maker Buyer’s Remorse


Energy Transfer Equity’s Kelcy Warren wants to restructure or escape the biggest deal of his life, but seller Williams Cos. won’t let go.

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Kelcy Warren, chairman of Energy Transfer Equity. In September, the Dallas company announced a $33 billion takeover agreement with Williams Cos., but Mr. Warren has since overseen a series of moves that could torpedo the deal. PHOTO: MATTHEW MAHON


Kelcy Warren became a billionaire oil man by making deal after deal, including purchases of thousands of miles of pipelines after Enron Corp. collapsed. Now he is suffering from a severe case of buyer’s remorse.

As low oil prices spread pain throughout the energy industry, Energy Transfer Equity LP, the Dallas company where Mr. Warren is chairman, is scrambling to restructure or escape a $33 billion agreement announced just seven months ago to acquire WilliamsCos., based in Tulsa, Okla. The deal would create a 100,000-mile network of pipelines.

Mr. Warren, 60 years old, has overseen a series of moves that could torpedo the biggest acquisition of his life, such as an unusual convertible preferred share issue that would dilute Williams shareholders and increase his own stake in the combined company.

When Williams Chairman Frank MacInnis called in February to complain, Mr. Warren responded curtly, according to Mr. MacInnis. “No one was going to tell him how to run his company,” Mr. MacInnis said in the unredacted version of a court filing reviewed by The Wall Street Journal. The comment is crossed out of a publicly available copy of the filing.

Energy Transfer disputes the comment but says the two men have talked a number of times about what would be in the best interest of shareholders. The company says Mr. Warren isn’t trying to kill the deal but is emphatic that it needs to be restructured.

The deal, one of the largest announced in 2015, is now in danger of becoming one of the highest-profile corporate casualties of the oil bust. After Messrs. Warren and MacInnis announced the agreement on Sept. 28, oil prices fell about 40%, though they have since rebounded. The share prices of both companies are still down by roughly half. The tumult also cost Energy Transfer’s chief financial officer his job.

The mess shows how vulnerable many deals are to souring financial markets. Deals touted as mutually beneficial when announced can quickly turn better for one side than the other. The same thing happened when credit dried up in the financial crisis and droves of buyers scrambled to get out of deals.

So far this year, about $378 billion in U.S. mergers and acquisitions have been abandoned, more than 40% higher than in all of 2015, according to Dealogic. This year’s broken-deal total will be a record even if no more deals fall apart.

Recent examples include Pfizer Inc.’s proposed $150 billion takeoverof fellow drugmaker Allergan PLC and the $35 billion merger of oil-field services companies Halliburton Inc. and Baker Hughes Inc.,which crumbled under pressure from U.S. regulators. Honeywell International Inc. and Canadian Pacific Railway Ltd. walked away from reluctant takeover targets.

Williams has filed lawsuits against Energy Transfer and Mr. Warren over the share issuance, alleging that it cheats Williams shareholders.

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After initially resisting the deal, Williams now is considering asking a judge to force Energy Transfer to complete the takeover, say people familiar with the matter. Williams says a failed deal would cost its shareholders $10 billion in lost value.

Mr. Warren has long kept a tight grip on his sprawling pipeline empire, launched two decades ago. In addition to Energy Transfer, he essentially controls three other publicly traded companies stitched together so complicatedly that some analysts decline to follow them, they say.

He also is one of the country’s richest men, with a net worth estimated at $7 billion by Forbes. Mr. Warren owns a private island in Honduras and an 8,000-acre property near Cherokee, Texas, that was once an exotic-animal ranch and is still home to roving zebras and buffalo.

His 23,000-square-foot Dallas mansion, bought for $30 million in 2009, includes a bowling alley and a baseball diamond that features a scoreboard with “Warren” as one of the teams.

He is an avid music fan and owns an independent recording studio that produced in 2014 a Jackson Browne tribute album with cover songs by musicians such as Bonnie Raitt and Don Henley.

Mr. Warren has boasted of seeing opportunity in downturns. He launched Energy Transfer in the wake of Enron’s demise and then expanded.

In 2012, another company he runs, Energy Transfer Partners, agreed to buy Sunoco Inc. for $5.3 billion while Sunoco was in the middle of a complex restructuring. The $5.7 billion takeover of pipeline company Southern Union Co., also in 2012, came after a hostile bidding war.

In 2013, he hired Jamie Welch, a longtime energy investment banker at Credit Suisse Group AG who shared Mr. Warren’s hearty appetite for deals.

The two men saw an opening in the oil rout that started in 2014, which Mr. Welch described as “a once-in-a-lifetime opportunity.”

During a brief uptick in oil prices early last year, Mr. Warren told analysts: “This is going to sound odd to you, almost sadistic, but I was disappointed to see a rebound in crude prices…I was excited to see who might be more vulnerable if we saw this market continue a downward trend.”

Energy Transfer set its sights on Williams and its crown jewel: the 10,000-mile Transco gas pipeline. But Williams stiff-armed Energy Transfer for months, according to securities filings.

When Energy Transfer made an all-stock offer in June then valued at $48 billion, Williams rejected it as too cheap and plowed ahead with plans to absorb an affiliate.

By the fall, Williams’s outlook had worsened. In addition to sapping pipeline demand, oil’s slide had hurt Williams’s gas-processing business, which is especially vulnerable to price swings. A big customer, Chesapeake Energy Corp., looked increasingly troubled, too.

At a meeting of Williams’s board of directors in Tulsa in September, the company’s advisers said investors were losing patience, according to people familiar with the matter.

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Hopes briefly flickered for a white-knight transaction with Warren Buffett-backed MidAmerican Energy Co., which expressed last-minute interest, but talks went nowhere, some of the people say.

Energy Transfer kept pushing for a deal, but the Williams board was divided seven to six against it. With tensions running high, the group took a break for dinner. Unable to find a private dining room big enough to accommodate them, they split into two groups, one “for” and the other “against,” people familiar with the matter say.

When the meeting reconvened in the morning, two directors had changed their minds. The deal was approved by an 8-5 vote.

Energy Transfer shareholders, who had bid up the stock price when the offer first surfaced, were unimpressed with the details of the takeover announcement. Energy Transfer shares fell 13% in one day.

Early signs that regret was setting in came when Mr. Welch, Energy Transfer’s finance chief, painted the deal unfavorably in conversations with some Williams shareholders in January.

He even suggested that they consider voting against it if they weren’t able to persuade Williams’s board of directors to revise the deal’s terms, these people say.

The merger contract is written with unusually tight provisions on how Energy Transfer can get out of the deal. Williams shareholders can vote it down.

Word of Mr. Welch’s efforts, which were earlier reported by the New York Times, filtered back to Williams. Integration meetings were postponed and progress slowed, people familiar with the matter say.

Energy Transfer’s public statements about the deal got noticeably cooler. In March, the company slashed its estimate of annual cost savings at the combined companies by more than 90%, said it would suspend cash distributions for at least two years and warned that a credit-rating downgrade was possible because of the combined companies’ heavy debt load.

Energy Transfer also backed away from its promise to keep a major presence in Williams’s hometown of Tulsa after the deal is completed.

Last month, Energy Transfer said its lawyers couldn’t guarantee the transaction would be tax-free to Williams investors, a condition of the merger’s completion. Williams disputes Energy Transfer’s legal position and says it is an attempt by Energy Transfer to wriggle out of the deal.

On an earnings call last week, Mr. Warren was dour about the takeover. “Absent a substantial restructuring of this transaction, which Energy Transfer has been very willing and actually desiring to do—absent that, we don’t have a deal,” he said. Mr. Warren declined to comment for this article.

One big sticking point is the $6 billion cash portion of the deal, or $8 a share. Energy Transfer and some analysts are worried that the cash payout would saddle the combined company with too much debt.

“Kelcy is firing every bullet he has,” says Benjamin Michaud, an analyst at asset manager H.M. Payson & Co., which owns $10 million of Williams shares and supports the takeover. “But from the standpoint of a Williams shareholder, $8 [a share] is very significant.”

Some Williams shareholders say there is so much acrimony between the two companies that it is hard to imagine them getting along if the deal goes through. “There’s got to be a lot of bad feelings on both sides of the aisle,” says Jay Rhame, a portfolio manager at Reaves Asset Management.

Tulsa Mayor Dewey Bartlett Jr. says that he sees nothing good about the proposed takeover and that he recently told Mr. MacInnis that in a meeting in New York. Mr. MacInnis declined to comment for this article.

The biggest flashpoint is the convertible-share issuance. In March, Energy Transfer insiders, including Mr. Warren, President John McReynolds and two directors, swapped their existing shares for special units, which would forgo cash distributions over the next nine quarters.

Those units are convertible into regular shares at a discount to the market price, giving their holders a bigger stake than they started with.

Energy Transfer has said the move would save $518 million to help pay down debt. The company says it wanted to offer the shares to all its investors, but Williams withheld its consent. Williams says it opposed the move because it would hurt Williams shareholders.

In April, Energy Transfer said it intended to suspend cash distributions after the merger, meaning the insiders will have given up nothing but still stand to receive more equity when the units are converted in 2018.

People familiar with the matter say Mr. Welch disagreed about how far Energy Transfer could go to try to get out of the takeover and balked at the convertible-share issuance. The finance chief told Mr. Warren the share issuance would damage Energy Transfer’s reputation on Wall Street. He also told his boss that he wouldn’t publicly defend the move, these people say.

That was the last straw in a relationship that already had become troubled. The cash portion of the deal terms was Mr. Welch’s idea, according to people familiar with the matter. He had argued that by including more cash, Energy Transfer could issue less stock and keep more of the upside of the combined company.

But as the industry’s outlook worsened and investors grew concerned about the combined company’s debt load, what seemed like a win for Energy Transfer became a liability.

Mr. Warren ordered Mr. Welch’s firing, according to people familiar with the matter. The company announced Feb. 5 that he had been replaced.

Mr. Welch has sued Energy Transfer for compensation he says he is owed by the company. Mr. Welch has said his termination was “motivated by an agenda unrelated” to his performance as chief financial officer.

Mr. Warren told analysts that “the decision was made by me that we needed to make a move, and we did.”

Last month, Williams filed one lawsuit in Delaware seeking to undo the convertible preferred share issue and another in Texas alleging that Mr. Warren interfered with the deal. Energy Transfer responded with a countersuit and says Williams breached the merger agreement by refusing to give its consent for the shares to be offered to all investors.

Unless the companies reach a surprise settlement, the deal’s fate will likely be decided by a judge in Delaware. A court hearing is scheduled for mid-June.

Write to Liz Hoffman at liz.hoffman@wsj.com and Alison Sider atalison.sider@wsj.com

From the Wall Street Journal

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