(Bloomberg) -- Energy Transfer Equity LP CEO Kelcy Warren feared that pushing ahead with a merger with rival pipeline operator Williams Cos. after a plunge in oil prices would prompt analysts to downgrade the company and cause an “implosion,” the firm’s former top financial executive said.
Warren began weighing whether to walk away from the combination with Tulsa, Oklahoma-based Williams in December 2015, saying the downturn in the oil and gas market raised fears about Energy Transfer’s viability, Jamie Welch, the company’s ex-chief financial officer, testified.
“He was of the belief if we had to close the transaction, we would have a credit-ratings downgrade that could create an implosion,” Welch testified in a video deposition played during a Delaware Chancery Court trial over the faltering merger.
Judge Sam Glasscock must decide whether Dallas-based Energy Transfer or Williams violated the merger agreement in ways that make it impossible to close the deal, once valued at $32 billion. Williams’s shareholders are scheduled to vote June 27 on whether they still want to be acquired by the rival pipeline company.
What looked like a good deal last year to combine two of the U.S.’s largest pipeline operators turned sour after plummeting oil prices upended its financial logic and raised questions about the benefits of the corporate marriage.
Since Energy Transfer offered to buy Williams for $43.50 a share in either cash or stock in September, the global glut of crude has wiped out almost half the value of both companies and forced the energy firms to twice slash the expected earnings boost from the merger. Oil prices plunged by almost $20 a barrel in the second half of last year while natural gas futures slid 16 percent.
Warren, who was in the Georgetown, Delaware, courtroom, has publicly said the merger can’t be finalized on its original terms because it has crippling tax issues. Williams’s officials counter that Energy Transfer’s top executive is using the tax argument as a pretext to scuttle the merger and is asking Glasscock to make its partner live up to the deal.
Vicki Anderson Granado, a spokeswoman for Energy Transfer, didn’t immediately return a phone call seeking comment on the testimony.
Welch, ousted as Energy Transfer’s CFO in February, said Warren called him while he was in Australia in December 2015 to explore what the company’s options were for pulling out of the deal. “He wanted to understand what the rights and obligations were under the merger agreement,” Welch testified. “If he could walk away under the merger agreement, he would have.”
Warren also showed little interest in offers from Williams’s executives to revise the merger to address questions about whether the IRS would view the combination as properly freeing investors of all tax liabilities, Welch said. The chief executive officer was “uninterested in restructuring” the deal, Welch said.
Williams officials also accuse Energy Transfer of violating the merger agreement by going ahead with an equity offering that wasn’t blessed by its merger partner. Williams says the offering was designed in part to unfairly increase Warren’s payout on units he held in some Energy Transfer’s partnerships.
Welch said he opposed setting up the offering that way, adding that Warren didn’t receive a salary or bonus and relied on the payments. “I didn’t understand the business justification for the preferred payment,” he said in the deposition.
Welch has sued Energy Transfer in state court in Texas over his ouster, saying he’s owed $1 million over his termination.
Williams claims that Energy Transfer officials banned some of its lawyers who’d suggested a fix to the tax problem from consulting with other attorneys hired to study the issue.
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