Is Williams the Next El Paso?

With Kinder Morgan's (NYS: KMP) $21 billion takeover of rival El Paso (NYS: EP) at a premium of 37%, the natural gas sector is abuzz with talks of further takeovers. One company that has come into the limelight is Tulsa, Oklahoma-based pipeline owner Williams (NYS: WMB) , as it seems to be one of the most inexpensive acquisition targets.

It's all natural
With natural gas consumption in the U.S. expected to increase 14% by 2035, gas and pipeline companies across the board are doing their best to make the most of the anticipated boost in demand. Plus, according to the U.S. Energy Information Administration, over 24 trillion cubic feet of natural gas was consumed in 2010, the highest amount so far. This gives natural gas transporters and producers a further impetus to expand.

Kinder Morgan's purchase of El Paso will create the largest pipeline company in the U.S. with around 80,000 miles of pipeline under its belt, going beyond Enterprise Products Partners' (NYS: EPD) 50,000 miles. Williams operates around 15,000 miles of pipeline catering to about 14% of the natural gas consumption in the U.S. The deal may lead to consolidation in the sector.

The ideal target
Williams has been looking to spin off its exploration and production segment this year. Williams' current market cap of around $16.2 billion makes it a potential takeover target. According to Bloomberg data, Williams is valued at 7.5 times its EBITDA, which happens to be the cheapest in the industry. It is also nearly half of what Kinder Morgan will pay for El Paso, which is valued at around 14 times its EBITDA.

The potential suitors may be Enterprise, TransCanada and Enbridge -- all of whom have been looking to scale up their operations. Houston-based Enterprise, whose market cap is more than double the size of Williams', has spent around $24.6 billion on mergers since the start of the millennium. Enterprise may look at Williams as a potential target, especially now since it has been pushed off the No. 1 podium.

The Foolish bottom line
Will Kinder Morgan's takeover of El Paso trigger further M&A activity? It remains to be seen. Timothy Ghriskey of the Solaris Group believes that it is "certainly always possible" that Williams may get acquired, according to Bloomberg. Acquisitions are always a possibility as companies look to grow inorganically with increase in natural gas demand.

To keep an eye on all the M&A activity and to follow any of the stocks mentioned above, click here to add them to your stock Watchlist.

At the time this article was published Shubh Dattadoesn't own any shares in the companies mentioned above.Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story