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[IMAGE] In an exclusive SCIENTECH PowerHitters interview, Keith Stamm, President and CEO of Aquila, Inc., shares on the dynamics behind the highly successful April IPO and Aquila's view of broadband and other trading markets to watch for in the upcoming months. Read the questions Stamm was asked at: www.scientech.com [IMAGE] [IMAGE] May 8, 2001 Williams in Agreement to Acquire Barrett Resources By Will McNamara Director, Electric Industry Analysis [IMAGE][IMAGE] 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 [IMAGE] The most comprehensive, up-to-date map of the North American Power System by RDI/FT Energy is now available from SCIENTECH. Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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