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Another comment on the Williams dealhttp://www.washingtonpost.com/business/economy/2015/05/26/e18479f6-03e4-11e5-8bda-c7b4e9a8f7ac_story.html Holding shares or units — those little words can mean big differences By Allan Sloan Columnist May 26 at 7:11 PM What happens when there’s a conflict between giving a multibillion-dollar tax break to the controlling holder of a publicly traded master limited partnership and giving that break to the entity’s public investors? As the unitholders of Williams Partners are finding out, the controlling holder keeps the break for itself and sticks Partners’ unitholders (including me) with a big fat tax bill. And it’s all perfectly legal. The word “unitholders” — as opposed to “stockholders” — is the reason why. You’re a unitholder because you own partnership units. You’re not a stockholder, because you don’t own stock. Welcome to the world of publicly traded master limited partnerships (MLPs), a place in which many investors, including me, began to seek high, tax-advantaged payouts when the Federal Reserve cut interest rates to zero in order to bail out the financial system and big, imprudent borrowers. At a company with publicly traded stock, management and controlling holders are obliged to put public shareholders’ interests above their own. It’s what legal types call a “fiduciary obligation.” However, the people who run publicly traded MLPs have no such obligation to public unitholders. So when Williams Companies, a corporation with publicly traded stock, decided it wanted to “roll up” the 42 percent of Williams Partners that it didn’t already own, it made a deal this month to swap newly issued Companies stock for the publicly traded Partners units. It’s a sweet tax deal for Companies’ stockholders, to whom Companies owes a fiduciary duty. It’s a sour deal for long-time Partners unitholders, to whom Companies owes no such duty, and whose units’ cost for tax purposes is extremely low. The company valued the tax break at $2.1 billion over 15 years when it announced the deal and said it might be higher when the deal is completed, slated for the fall. Tax expert Robert Willens, whom I asked to analyze this deal, told me that Companies could have set up the takeover to defer taxes for Partners holders until they sold the Companies stock they get in the transaction. Instead, Willens said, Companies set up the deal so that Companies holders will realize all the benefits, and Partners holders get a tax bill. And I’m going to get a big one, whether I wait for the deal to close or sell my units in the market. My “tax basis” — cost for tax purposes — in my Partners units is about 15 percent of their current market value. That’s because I’ve owned units since 2008, reinvested my distributions (which people often mistakenly call dividends) and occasionally bought additional units with cash. Please note that I’m not whining or threatening to throw in with the half-dozen or so law firms that announced plans to look into the deal almost immediately after it was announced May 13. I’m just pointing out how the world works — and pointing out a danger that holders of publicly traded partnerships should be aware of. I first learned of the “no fiduciary obligation” factor in 2007, when I wondered how Blackstone, a leading private equity shop, could set up its going-public transaction in a way that stuck public unitholders with the tax bill for insiders selling out. It was an informative lesson. So I’m not pleading ignorance. I have sold my holdings in two other MLPs but had no plans to sell my Williams Partners units. That’s the price I pay — and some Kinder Morgan Partners unitholders paid — for owning a security whose managers are permitted to favor the interests of shareholders in a related company over unitholders’ interests. I asked Companies about this transaction, and why Partners holders, who will own 27 percent of Companies after the deal is completed, are bearing 100 percent of the cost of the tax benefit that will accrue to Companies. Companies declined to comment other than to refer me (very courteously) to various public statements and records and to say that some of my questions may be addressed in securities filings next month. So there you have it. When your MLP units shower you with tax-advantaged cash, they’re great. But when the controlling holders’ interests diverge from yours, you discover (to paraphrase the late New Jersey Devils owner John McMullen) that there’s nothing quite as limited as being a limited partner. |
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