Is Spectra Energy Preparing a Play for Williams?

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Is this another David versus Goliath story? Will David prevail again? These are the big questions that flow from an exclusive report from Reuters last Friday that Spectra Energy Corp. (NYSE: SE) is preparing an offer to acquire Williams Companies Inc. (NYSE: WMB). With a market cap of around $40 billion, Williams easily tops Spectra’s $19.2 billion valuation.

The size issue narrows considerably when Spectra Energy Partners L.P. (NYSE: SEP) and its $14.7 billion market cap are tossed into the mix on Spectra’s, and that combination is what could make the play for Williams.

Williams has already rejected an offer of around $48 billion ($64 per share) from Energy Transfer Equity L.P. (NYSE: ETE), saying the offer “significantly undervalues Williams and would not deliver value commensurate with what Williams expects to achieve on a standalone basis.” Energy Transfer’s offer did not include paying for Williams Partners for which Williams was offering around $14 billion to acquire the portion of its master limited partnership that it did not already own. Energy Transfer’s unwillingness (inability?) to pay for Williams Partners may have had something to do with the rejection. Williams Partners has a current market cap of around $23.4 billion.

In a note to clients on Tuesday, Credit Suisse suggests a possible scenario in which David matches up pretty equally with Goliath: by using Spectra Energy Partners to acquire all of Williams Partners L.P. (NYSE: WPZ), and then using the associated additional incentive distribution rights (IDRs) to generate accretion or a higher price compared to the Equity Transfer offer — or both.

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Here is how Credit Suisse sees SEP fitting into an offer from Spectra: SEP offers a 30% premium to acquire WPZ and the acquisition delivers an increase of approximately 25% to SEP’s distributable cash flow in 2017. At the same time, the deal would deliver about $1.7 billion in cash to Spectra (representing a net increase of $400 million after incremental dividends from the larger number of Spectra shares) as a result of the IDRs from the 100% unit-for-unit exchange of SEP units for WPZ units.