Over the Weekend: Another M&A Deal in Trouble?
The Williams/ETE merger, a deal already sealed, now appears in jeopardy:
But what about Pfizer-Alergan. Surely a government reg crushing a deal doesn't signal a reduction in liquidity available for the deal? Well, we don't know. Both companies backed out of the deal without a fight as soon as the government announced its new reg. Perhaps that was simply each side acknowledging it wasn't worth the time and expense to fight the government. Or perhaps there were growing issues that had already caused both sides to use the government reg as an excuse to call a halt to negotiations of final terms. (The terms of the financing of the deal hadn't been finalized at that point.)
The important point in the case of either deal is that companies aren't going to come right out - at least at this point - and say: Liquidity's drying up. That's the sort of thing that spooks markets, or even causes panic. Rather they'll come up with all sorts of alternatives reasons why the deal fell through. The fact is, Wall Street isn't going to publicly fess up that credit's drying up. They'll always see the silver lining in the deal-making environment even if they have to draw it in silver crayon to keep up the illusion that "All's well."
And so we continue to keep our eye on credit markets. And with last week's stock market ending on a strong down note on Friday, we may be in for some stronger stirring of the bear market which we believe has already begun. As we noted last week, "With credit in various sectors of the markets tightening, it's a trend that, if it strengthens, would pull stock down. The theory behind this is simply that if "liquidity" - a/k/a credit - dries up, stock will too."
Williams Cos. said Energy Transfer Equity LP is breaching a merger agreement “through a pattern of delay and obstruction” and asked a court in Delaware to prevent the pipeline operator from terminating the deal.Reflecting our concern expressed last week of a building credit crisis, let's remember that one of the signs of liquidity drying up is the decrease in M&A deals. And while this deal was consummated - or so Williams thought - it's not quite working out so far. ETE's dragging its heals. This may remind you of the Pfizer-Alergan deal. That one died because of government regulation. So how do either of these indicate a problem with liquidity, i.e. credit availability? Well, on the face of it, it seems they don't. Pfizer-Alergan was crushed by government regs. As for Williams ETE:
The dispute marks the latest obstacle in a proposed merger that has seen its value crater. Williams shares have plunged 47 percent since the deal was announced on Sept. 28, while Dallas-based Energy Transfer is down 38 percent. The drop in oil prices, which has weighed on both companies’ shares, casts doubt on whether Energy Transfer will actually follow through with the purchase.But wait. The "drop in oil prices, which has weighed on both companies' shares" basically reduces the value of the "currency" used in this deal - the company shares. The announcement of the deal specified that: "The sources of funds would mainly include issuance of ~$26.8 billion in ETC shares and new transaction-related debt of ~$6.0 billion to fund the cash component of the deal." With the collapse of energy prices subsequent to the announcement, the value of that "source" deteriorated: a reduction in liquidity available for the deal.
But what about Pfizer-Alergan. Surely a government reg crushing a deal doesn't signal a reduction in liquidity available for the deal? Well, we don't know. Both companies backed out of the deal without a fight as soon as the government announced its new reg. Perhaps that was simply each side acknowledging it wasn't worth the time and expense to fight the government. Or perhaps there were growing issues that had already caused both sides to use the government reg as an excuse to call a halt to negotiations of final terms. (The terms of the financing of the deal hadn't been finalized at that point.)
The important point in the case of either deal is that companies aren't going to come right out - at least at this point - and say: Liquidity's drying up. That's the sort of thing that spooks markets, or even causes panic. Rather they'll come up with all sorts of alternatives reasons why the deal fell through. The fact is, Wall Street isn't going to publicly fess up that credit's drying up. They'll always see the silver lining in the deal-making environment even if they have to draw it in silver crayon to keep up the illusion that "All's well."
And so we continue to keep our eye on credit markets. And with last week's stock market ending on a strong down note on Friday, we may be in for some stronger stirring of the bear market which we believe has already begun. As we noted last week, "With credit in various sectors of the markets tightening, it's a trend that, if it strengthens, would pull stock down. The theory behind this is simply that if "liquidity" - a/k/a credit - dries up, stock will too."
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