Williams in Agreement to Acquire Barrett Resources ,
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May 8, 2001

Williams in Agreement to Acquire Barrett Resources 

By Will McNamara
Director, Electric Industry Analysis 

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Barrett Resources Corporation (NYSE: BRR) announced that it has signed a 
definitive merger agreement with The Williams Companies, Inc. (NYSE: WMB) for 
Williams to acquire all outstanding shares of Barrett in a transaction valued 
at approximately $2.8 billion, including the assumption of about $300 million 
in debt. The terms of the merger agreement, which was approved by both 
companies' boards of directors, provides for Williams to promptly commence a 
first-step cash tender offer of $73.00 per share for 50 percent of the 
outstanding Barrett common stock, followed by a second-step merger with a 
fixed ratio of 1.767 shares of Williams common stock for each remaining share 
of Barrett common stock. Based on Williams' closing price on May 4, 2001, the 
stock portion of the transaction is valued at $73.63 per share. On this 
basis, the transaction has a blended value of $73.32 per share. 

Analysis: This is a major coup for Williams as it transforms the company into 
a natural-gas transporter and producer, which should offer tremendous support 
to its already hugely successful power trading operation. As the United 
States continues to face a natural-gas shortage, Williams is wisely acquiring 
assets that will guarantee it a steady flow of natural-gas supply, which the 
company estimates will contribute to nearly 50 percent of its supply 
obligations. Much like its competitor Calpine Corp., which recently acquired 
natural-gas company Encal Energy, Williams is shrewdly reshaping its business 
model to gain lucrative control over power supply, in addition to its 
prominent positions as a power marketer and trader. 

As has been widely publicized, Williams has secured the acquisition of 
Barrett away from competing bidder Shell Oil Co., a unit of Anglo-Dutch 
powerhouse Royal Dutch / Shell Group and the world's second-largest oil 
company (behind Exxon Mobil). Shell had been aggressively pursuing Barrett in 
a hostile takeover for months, and had increased its bidding offer to $60 a 
share as late as last week. Barrett, a relatively small natural-gas operation 
but one that owns valuable reserves in the Rocky Mountains, resisted Shell's 
advances for reasons that are not completely known, and put itself back on 
the market last week. Williams entered the picture and trumped Shell's 
proposal, with an offer to pay $73 per share. Some financial analysts have 
already claimed that Williams is overpaying for Barrett, as the $73 per share 
purchase price represents about a 51-percent premium over the $45-a-share 
price of Barrett's stock before Shell made its original offer in March. Shell 
appears to agree that the price Williams is paying is too high. Once Williams 
made its offer, Shell quickly bowed out of the bidding war, stating that 
although it still wanted to partner with Barrett it was unwilling to pay an 
excessive price for the company.  

So what makes Barrett so appealing to Williams? Barrett, an independent 
natural-gas and crude oil exploration and production company, is in the 
business to locate and produce natural-gas supplies. As natural-gas supplies 
have tightened, Barrett's profile in the industry has ascended, which peaked 
Shell's original interest. Up to this point, Williams has primarily operated 
as a trader and distributor, and therefore has been subject to the volatility 
of the wholesale market and the scarcity of natural-gas supplies. By 
controlling the commodity itself, Williams will not only have a guaranteed 
flow of supply to fulfill its contracts, but also will have more flexibility 
to sell its power in markets where it can charge the best price. Most of 
Barrett's exploration efforts are concentrated around the Rocky Mountains 
(Colorado, Wyoming and southeastern Kansas), which offers good proximity to 
the power-starved and high-growth Western states. Further, Barrett represents 
a strong company, with a market capitalization of $2.25 billion and P/E ratio 
of 29.82 (compared to Williams' market capitalization of $19.7 billion and 
P/E ratio of 16.70). 

The benefit to Williams is clear. At the very least, the acquisition of 
Barrett more than doubles Williams' natural-gas reserves. Presently, Williams 
controls about 1.2 trillion cubic feet of natural gas (mostly in Colorado, 
New Mexico and Wyoming) and has established a strong presence on the delivery 
side of the natural-gas business. Williams produces about 15,000 MW of 
electricity per year, but has established a goal of producing about 45,000 MW 
within the next few years. Already this business model has paid off nicely 
for Williams, which reported $912.4 million in marketing and trading revenue 
for year-end 2000, more than doubling revenue from 1999. For 1Q 2001, 
Williams' overall profit increased to $484.5 million, up from $77.8 million 
in 1Q 2000.  

The acquisition of Barrett provides Williams with about 2.1 trillion cubic 
feet of gas reserves, which can be added to Williams' transportation and 
trading operation. In other words, Williams will gain a secure stream of a 
commodity that is currently in short supply and prone to red-hot prices. In 
terms of reserves, Williams reportedly will become the tenth largest 
natural-gas company in the United States. Further, as natural-gas supplies in 
Texas and the Gulf of Mexico (traditionally good source locations) appear to 
be diminishing, Williams gains assets in the Rocky Mountain region, where 
natural-gas exploration is flourishing.  

As noted, Calpine Corp. (NYSE: CPN)-which has a rather parallel business 
model to Williams, at least on the trading side-also is leading the trend 
toward natural-gas consolidation. Just last week, Calpine announced a 
partnership with Kinder Morgan Energy Partners (NYSE: KMI) to jointly develop 
the Sonoran Pipeline, a 1,160-mile high-pressure interstate natural-gas 
pipeline from the San Juan Basin in northern New Mexico to markets in 
California. This announcement followed Calpine's acquisition earlier this 
year of Toronto's Encal Energy, whose assets currently produce approximately 
230 million cubic feet of gas equivalent a day and can access about one 
trillion cubic feet of proven and probable gas resources. Williams has a 
similar project in Florida, where it has partnered with Duke Energy to 
jointly purchase the Coastal Corporation's 100-percent interest in the 
Gulfstream Natural Gas System project. The Gulfstream project is a proposed 
744-mile steel pipeline designed specifically to deliver natural gas into 
Florida. 

As a side note, Shell's loss of Barrett must be particularly painful for the 
international oil titan as it is the second failed acquisition that the 
company has experienced within the past few weeks. Shell also lost a bid for 
Australia's Woodside Petroleum, for which it offered $5.1 billion, when the 
Australian government blocked the deal due to "national interest" concerns. 
Shell certainly had the economic resources to make a higher bid for Barrett, 
but the company has steadfastly maintained its principle of not making what 
it deems as overpayments for prospective companies. In addition, Williams' 
strong stock and strong profits value also supported the purchase of Barrett, 
despite the fact that by comparison Williams is a much smaller company than 
Shell Oil. For its part, Shell says that it will continue to seek other 
acquisitions that "strengthen and diversify its assets portfolio outside its 
existing core areas." 

Williams stock fell about $3.52 (more than 8 percent) upon word of the 
acquisition, which is not surprising since it is attempting to purchase a 
larger company at a very high premium. Barrett shares jumped about $1.85 to 
$69.15. As of mid-morning trading on May 8, Williams shares were priced at 
$39.28, while Barrett shares were priced at $70.15. 

In order to close the acquisition, Williams needs to receive approval from 
antitrust regulators and shareholders. However, both companies remain 
confident that they can close the acquisition in 60 to 90 days.  To protect 
its stock, which apparently played a factor in its ability to support the 
acquisition of Barrett, Williams reportedly is including a "break-up" fee in 
the purchase contract, which would be applied in the event that Williams 
eventually loses Barrett to another company or if the deal is not completed.  

An archive list of previous IssueAlerts is available at
www.scientech.com


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