Is this another David versus Goliath story? Will David prevail again? These are the big questions that flow from an exclusive report from Reuters last Friday that Spectra Energy Corp. (NYSE: SE) is preparing an offer to acquire Williams Companies Inc. (NYSE: WMB). With a market cap of around $40 billion, Williams easily tops Spectra’s $19.2 billion valuation.

The size issue narrows considerably when Spectra Energy Partners L.P. (NYSE: SEP) and its $14.7 billion market cap are tossed into the mix on Spectra’s, and that combination is what could make the play for Williams.

Williams has already rejected an offer of around $48 billion ($64 per share) from Energy Transfer Equity L.P. (NYSE: ETE), saying the offer “significantly undervalues Williams and would not deliver value commensurate with what Williams expects to achieve on a standalone basis.” Energy Transfer’s offer did not include paying for Williams Partners for which Williams was offering around $14 billion to acquire the portion of its master limited partnership that it did not already own. Energy Transfer’s unwillingness (inability?) to pay for Williams Partners may have had something to do with the rejection. Williams Partners has a current market cap of around $23.4 billion.

In a note to clients on Tuesday, Credit Suisse suggests a possible scenario in which David matches up pretty equally with Goliath: by using Spectra Energy Partners to acquire all of Williams Partners L.P. (NYSE: WPZ), and then using the associated additional incentive distribution rights (IDRs) to generate accretion or a higher price compared to the Equity Transfer offer — or both.

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Here is how Credit Suisse sees SEP fitting into an offer from Spectra: SEP offers a 30% premium to acquire WPZ and the acquisition delivers an increase of approximately 25% to SEP’s distributable cash flow in 2017. At the same time, the deal would deliver about $1.7 billion in cash to Spectra (representing a net increase of $400 million after incremental dividends from the larger number of Spectra shares) as a result of the IDRs from the 100% unit-for-unit exchange of SEP units for WPZ units.
Assuming no collars on the transaction and total synergies of around $200 million, Spectra can expect 11% accretion and offer a 5% premium to the current market price. That is near the intrinsic value of the existing proposed Energy Transfer-Williams transaction. With the cash flow accretion, Spectra could raise the bid by approximately 2% for Williams while maintaining 10% cash flow accretion for Spectra shareholders in 2017.

If Energy Transfer were to get some help from Sunoco Logistics Partners L.P. (NYSE: SXL), the midstream company it controls through Energy Transfer Partners L.P. (NYSE: ETP), the same 30% premium paid by SXL for WPZ would result in $2.2 billion in cash to Energy Transfer Equity ($1.1 billion net after incremental distributions due to more ETE units) as a result of the IDRs from the 100% unit-for-unit exchange of SXL for WPZ units.

Here is how Credit Suisse compares the outcomes of the two scenarios:

Comparing ETE/SXL vs. SE/SEP … it’s tough to call out a clear winner: On the one hand the transaction appears more accretive to [Energy Transfer Equity] vs. Spectra but less accretive to SXL vs SEP. In both cases there is significant benefit to involving an MLP under the control of the [general partner]. [Energy Transfer Equity] could forgo some of the incremental cash flow from SXL. [Spectra and SEP] could do the opposite via a supplemental distribution of some kind. Both approaches would face conflicts committee issues. Also, Spectra would likely have to divest Texas Eastern pipeline.

Credit Suisse analysts also said that a number of other possible buyers signed confidentiality agreements, but that these are likely just tire-kickers. One interesting possibility would be an acquisition by Kinder Morgan Inc. (NYSE: KMI), but the analysts do not think that Kinder’s stock has the “fire power” to make a serious offer. Add to that antitrust concerns. According to unnamed sources cited by Reuters, final bids for Williams are due the last week in August.

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When it is all said and done, here is what Credit Suisse says:

Williams and WPZ have already risen on the news reports, but given the accretion calculations we have run, WPZ would appear to have more transaction upside in a bidding war. A revised ETE/SXL bid likely means SXL could face price headwinds while ETE goes higher and [Spectra] advances at the expense of SEP should SEP sweeten an offer.

Credit Suisse warns, “With such a complicated combination, while we have attempted to be accurate we could have made a miscalculation.” In other words, we are the professionals, so don’t you try this at home.

Williams stock jumped from $48.34 to $60.86 on the day the Energy Transfer offer was announced in late June. Since then it dipped back to $48.53, before rising again in the past eight days to close at $53.86 on Tuesday. The stock’s 52-week range is $40.07 to $61.38.

Williams Partners saw its common units drop from $53.14 on the trading day before the offer was announced to $49.10. The units have drifted slowly downward and closed most recently at $40.45.

Spectra Energy’s stock has dipped a bit following the Friday’s report from Reuters from $30.10 to $29.46 Tuesday. The stock’s 52-week range is $28.17 to $42.18.

Sunoco Logistics’ common units have also dipped since Friday, from $36.32 to $35.80. The 52-week range on the units is $32.56 to $52.47.

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