Last Thursday, Enterprise Products Partners L.P. (NYSE: EPD) confirmed that it had approached the Williams Companies Inc. (NYSE: WMB) about a merger and then said it had withdrawn its offer. Enterprise cited a lack of engagement on the part of Williams and said that Enterprise had “determined that there is no actionable path forward toward an agreement.” But that was then and this is now.

Monday morning, activist investor Keith Meister of Corvex Management sent an open letter to the three newly added board members of Williams encouraging them to be more open to offers for a merger, including the recent one from Enterprise.

Describing the Williams board as “saddled with six directors and a CEO” who have failed to prioritize shareholders’ interests, Meister wrote:

Although in its responsive press release WMB stated that it was “surprised” by the Enterprise announcement, it certainly did not surprise Corvex. This exchange of press statements is striking evidence of the inadequacy of the legacy WMB board to represent stockholders, confirming our belief that the legacy Board of WMB would not engage with EPD. The statement by EPD that WMB failed to engage with EPD, thereby causing EPD to perceive “no actionable path forward”, makes it crystal clear to me both that the current board is not functioning properly and that it is imperative to quickly populate the board with a majority of qualified, independent directors.

Meister and Corvex recently lost a battle to unseat Williams CEO Alan Armstrong that resulted in the resignation of six Williams board members. Williams replaced three of the six at the same time that Meister said he wanted to replace all seven remaining.

In addition to the six board resignations, Williams has cut its dividend by 70%, probably rubbing salt into the wounds it had dealt to Corvex already.

The main bone of contention between Meister and Williams is CEO Armstrong’s determination to keep Williams independent. Meister says if that works out to be the case after careful consideration of other alternatives, such as merging with Enterprise, than a standalone Williams is fine with him.

He then points to the benefits to stockholders of a deal with Enterprise:

On a standalone basis, WMB is levered 6.0x and has cut its dividend to $0.80 per share.  Pro forma for a combination with EPD (assuming reasonable assumptions and synergies) the combined company would be less than 4.5x levered, could pay a $2.30 per share dividend and still maintain a distribution coverage ratio of 1.2x.  At EPD’s current yield (5.9%) this would deliver a stock price of $39 per share or a 50% premium to [WMB’s] unaffected price of $26 per share.

Williams (and EPD) stockholders would be able to participate in both cost and revenue synergies which I believe could be substantial.

Due to an over-leveraged balance sheet, WMB is currently retaining earnings to fund its growth program.  Conversely, EPD has significant access to both debt and equity markets on attractive terms.  EPD 10 year credit spreads are less than half of WMB’s, making the value of WMB’s future growth projects much higher inside the pro forma company.

As Meister accurately points out, growth is everything in the midstream business and consolidation has already begun. Enbridge Inc.’s (NYSE: ENB) acquisition of Spectra Energy Inc. (NYSE: SE) will form a $130 billion behemoth. As Meister puts it:

Cost of capital is critical in the midstream business and scale goes hand in hand with cost of capital.  While I remain open minded to all strategic alternatives that WMB might pursue (including remaining independent if, after thorough consideration, that is the path that delivers the most value), consider the size, scale, and access to capital that would come with an EPD merger: the pro forma company would be the 3rd largest energy company in North America with an enterprise value in excess of $130 bn and consolidated EBITDA of greater than $10 bn.

While it’s clear what Meister and Corvex want, it seems reasonably clear that achieving the goal is not going to be easy, especially now that the board has been cut by three members. Those who remain supported Armstrong and are not likely to stop now. Even if so inclined, the three new members are unlikely to be able to push hard enough against those seven.

Williams stock traded up about 1.3% shortly before noon Monday, at $30.43 in a 52-week range of $10.22 to $47.05. The consensus 12-month target is $27.67.

Enterprise shares traded up about 0.8%, at $27.03 in a 52-week range of $19.00 to $30.11. The consensus price target on the stock is $32.81.

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