You would think a merger between two affiliated entities would be easy to pull off. Not so with Energy Transfer Equity’s purchase of Energy Transfer Partners, which has been selected as a finalist for the 2018 M&A Deal of the Year award by the Dallas/Fort Worth chapter of the Association of Corporate Counsel.
For one thing, the deal was massive: It involved $27 billion in stock and $35 billion in debt assumption to create a $90 billion energy infrastructure giant. It had incentive distribution rights that had to be dealt with and had to clear conflicts committees from each entity. The timing also had to be right or else the deal might negatively affect the combination’s credit rating.
“While they called it a simplification, there was nothing simple about it,” said David Kilpatrick, vice president of business development and general counsel at EnvironX Solutions and a judge for the award.
Another judge, Capital Market Ventures CEO Darwin Bruce, noted that the two parties had to not only account for the business goals they were trying to achieve but make sure each of them was protected. “That added complications to it,” he said.
Those nominated for working on the merger were ETE general counsel Tom Mason and ETP general counsel Jim Wright, who have worked at the entities for 10-plus years; Vinson & Elkins for ETP with a team led by partners Lande Spottswood and Steve Gill, senior associate (now partner) Brittany Sakowitz and associates Yong Eoh, Burke Wendt and David Lassetter; and Latham & Watkins for ETE with a team led by partners Bill Finnegan and Debbie Yee and associates Kevin Richardson, Thomas Verity and Daniel Harrist.
Forty lawyers plus around 40 support personnel were involved in the transaction. Other Texas lawyers working on the deal were V&E partner Ryan Carney on tax with help from associate Christine Mainguy; and Latham partner Tim Fenn and associate Bryant Lee on tax matters and partner Craig Kornreich and counsel Pamela Kellet on finance.
How did the deal come about? ETP general counsel Wright said there was a lot of pressure to simplify the two entities’ structures, as others in the marketplace were doing, reduce the cost of capital and lower what was perceived to be very high distributions.
“There had been this pressure for some time, and when [CEO] Kelcy Warren and the board started looking at the economics, it made sense and came at the right time,” Wright said.
Wright explained that ETP had been bringing some big projects on line and the additional revenue boosted its cash position, allowing it to pay down debt to 4.5 times EBITDA. Projections for new projects in the latter part of 2018 and 2019 also improved the outlook for a combined entity. “Put all those things together, it created a better financial position,” he said.
ETP’s general counsel said the entities and their conflicts committees “locked in” for several days of back-and-forth negotiations to get to a term sheet that would work.
“They [the committees] were very deliberate, took it very seriously and there was truly independence,” he said. “It wasn’t easy and not a slam dunk, with smart people asking good questions and lots of iterations of the numbers.”
All in all, the entities ran a good process, Wright said. “It was fair and in the best interest of each of our companies and our unitholders,” he said.
Analysts at Tudor, Pickering, Holt said while the offer provided only a “modest” 11 percent premium, they thought collapsing the limited partner/general partner structure and eliminating associated incentive distribution rights would “assuage investor concerns on alignment.”
The regulatory approval process went smoothly, but the vote of the unitholders was still a concern, given that distributions were probably going to be less for the combined entity.
“There’s always a worry that someone who has a short-term way of thinking may not be in favor of the deal, that all they cared about was distributions,” Wright said. “There were negative articles out there, saying that this was a stealthy way to cut distributions.”
In the end, about 98.2 percent of the ETP units that were voted at a special meeting in October gave the transaction a thumbs’ up, with the deal closing shortly thereafter.
Wright said the overwhelming opinion of analysts about the deal continues to be good, “even though the units don’t reflect the long-term benefits,” noting the effect of lower oil prices on the combination’s stock.
Wright – who graduated from South Texas College of Law and previously worked in legal at Enterprise Products Partners and El Paso Corp. – became executive vice president of legal and chief compliance officer of the new entity.
Mason – who graduated from the University of Texas’ law school and previously practiced at V&E in Houston – continued as executive vice president and general counsel (and Wright’s boss) but also took an operating role as president of unit Lake Charles LNG.
Wright said ETE and ETP went with V&E and Latham because the two firms have known the entities the best and done the most work for them (it also helped that Mason had worked at V&E for five-plus years).
“Those two firms have really known us top to bottom more than any of the other firms, and from an efficiency standpoint, it made a lot of sense,” he said.
Spottswood in particular had worked with the entities on several transactions and had a good demeanor, Wright said. “She is fast, smart and knows our company well,” he said. “She instilled a lot of confidence in our board and our conflicts committee.”
Spottswood said the parties were able to get the deal done faster than anyone expected because they knew the assets well and the combination made sense.
“There wasn’t a lot of homework people had to do, it was just figuring out what the right exchange ratio was,” she said. “When a deal has a good rationale, it makes lawyers’ jobs pretty easy.”
Going forward, Wright said the combined entity – now called simply Energy Transfer – will continue paying down debt with the hopes of it getting it down to 4 times EBITDA. And instead of funding internal growth projects with debt, as was typically done in the past, the new entity will try to fund them with excess cash.
“We’ll continue to do new projects in 2019 with the hope that our distributions will increase going forward,” he said.
What about M&A? Wright said Energy Transfer hasn’t stopped looking at deals but hasn’t found enough good ones. “As we get bigger and bigger, it gets harder and harder to do deals that are immediately accretive to our bottom line,” he said. “Our folks will be choosy on that stuff going forward and very diligent on the financials.”