Williams buys out infrastructure affiliate for $13.9bn

Williams, the US oil and gas pipelines group, plans to take full ownership of its associated company Williams Partners in a $13.9bn deal, marking the latest restructuring of US energy infrastructure groups.

The two businesses have agreed an all-share deal for Williams to buy the 40 per cent of Williams Partners that it does not own already, at a price that values the entire partnership at $34.7bn.

The move follows similar deals announced last year by Kinder Morgan, in which the company bought out the minority holdings in three linked parternships.

William Partners owns and operates gas pipelines and processing plants. It was created in its present form through a restructuring of the Williams group in 2010, in which it received several large assets from its parent, including the Transco gas pipeline system that stretches from Texas to New York.

It is a master limited partnership, a tax-advantaged business structure that has become increasingly popular in the US energy industry in recent years. It has units instead of shares, and unlike a conventional company pays no corporate tax. Investors instead pay income tax on their share of the partnerships' profits.

The tax benefits of MLPs, which are available only to energy businesses, have made them a low-cost way to raise capital, and they have proliferated in the US oil and gas boom of the past decade. There were 71 at the end of 2009 and there are now 121.

However, the disadvantages of the structure have also become increasingly apparent. In particular, investors have become more aware of "incentive distribution rights": terms in the partnership agreement that give the controlling general partner a rising share of the MLP's profits.

As the general partner, the Williams parent company benefitted from that arrangement, but investors wanted to be compensated for that, so it increased the cost of capital for the partnership. Williams said the cost of capital would be lower if it abandoned the MLP structure, and the incentive distribution rights, and was structured as a regular corporation.

It added that as a result of buying out the partnership it expected to be able to increase its dividend to 64 cents per quarter for the second half of this year, and then raise it by 11 per cent next year, and by "approximately" 10-15 per cent per year out to 2020.

The deal offers Williams Partners unitholders 1.115 Williams shares for every unit. That values each unit at about $59.83 based on the Williams share price on Wednesday morning, giving a premium of about 25 per cent to the closing price of the units on Tuesday evening.

However, Williams Partners units have been losing value for the past six months, having peaked above $65 in November.

The companies expect the acquisition to close in the autumn of this year.

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