Energy Transfer Equity’s (NYSE: ETE) mistimed pursuit of Williams (NYSE: WMB) was never a simple deal. The merger agreement they sealed eight months ago required the creation of a special investment shell to let the MLP bag its mammoth corporate quarry without triggering an equally massive tax bill for the sellers.

Now Energy Transfer and its CEO Kelcy Warren are using that very complexity in an attempt to get out of deal obligations that have become onerous. Energy Transfer Equity has acknowledged in recent securities filings that the extra debt of $6 billion taken on to finance the cash portion of the tab for Williams would likely force it to eliminate distributions for the next two years.

Warren and other insiders would be spared the hit under the terms of a controversial private offering that’s at the crux of the legal dispute between Energy Transfer and Williams. They’ve also threatened to further dilute the current Williams shareholders’ stake in the merged entity by means of an executive incentive plan.  

The Delaware Chancery Court where Williams has sued Energy Transfer has agreed to consider the complaint in expedited fashion, presumably before the merger drop dead date of June. 28. Thereafter, either party can walk away without financial sanction.

And though it’s clear this engagement is on the rocks, the terms of it require both parties to pretend otherwise. Absent a court ruling, the Williams board has to ask shareholders to approve what it now plainly views as a raw deal or else risk owing Energy Transfer a $1.5 billion breakup fee. Energy Transfer has to go through the motions of trying to close a merger it really would prefer to scuttle to fend off Williams claims that it’s in breach of its commitments.

Assurances that all the bridges haven’t yet been burned grow less convincing with every claim and counterclaim, however. In addition to suing Energy Transfer in Delaware, Williams is going after Warren personally in Texas, accusing him of tortious interference with the merger. Energy Transfer, in turn, is arguing in Delaware that the very act of suing Warren personally is a material breach of deal terms by Williams.

It’s also seized on the possibility that the IRS might not deem the cash portion of the deal to be a tax-free exchange after all. That’s on the advice of its legal counsel, which has come up conveniently shy about issuing the required opinion to the contrary.

“We can’t close. We don’t have a transaction that can close,” Warren said during Energy Transfer’s May 6 conference call. “So I want to be very clear, we can’t close this transaction. We have a merger agreement. We have obligations under that merger agreement. We take that very seriously. We intend to honor all of our commitments under the merger agreement, but we can’t close this deal. We don’t have a deal that’s closeable.”

“So absent of a substantial restructuring of this transaction, which Energy Transfer has been very willing and actually desiring to do, absent that, we don’t have a deal. We’ll work it the best we can. We think Williams will as well. We think we will engage with Williams and attempt to get a transaction that can close, but the one we have now cannot.”

Warren is probably sincere about wanting Williams assets so long as Energy Transfer doesn’t have to lay out as much cash as it promised in September’s deal. His strategy revolves around filling gas pipes and the value-added logistics hubs. And Williams is uncommonly well placed to deliver those volumes.

So if economics and game theory were the only considerations there would be ample middle ground for a mutually beneficial renegotiated deal. Replacing lots of extra debt and a resulting distribution cut with equity and an equitable resolution would be a clear win/win.

The risk is that people often fail to strike mutually beneficial deals out of sheer spite. And it’s fair to wonder whether Energy Transfer and Williams are now past that point.

The legal track record of enforcing supposedly ironclad merger contracts in U.S. courts is less than ironclad, so failing to compromise poses considerable risks for both parties. In a just world Williams would prevail, since Warren’s maneuverings clearly seem to contravene the spirit and quite possibly the letter of the merger contract. But Warren has fancy lawyers arguing otherwise, and the tax-free exchange issue provides another excuse not to cut that $6 billion check.

ETE units have rallied 45% since we called it our #1 Best Buy, noting its particularly attractive valuation, on April 16. WMB gained only 22% over the same span. It’s now priced at 23% discount to the terms of the original deal, down from 29% a week ago. That’s based on the prevailing view that a successful closing is very unlikely.

With the merger widely discounted, Williams is certainly not getting much if any credit for its damages claim against Energy Transfer, which it cheerfully overestimates at up to $10 billion. That sum is probably a pipe dream, but Warren’s tactics have been so brazen and transparently self-serving that the possibility of a big judgement against him and Energy Transfer can’t be dismissed.

That risk already looks fully discounted in ETE’s valuation, as discussed last month, so it remains the #1 Best Buy below $15. But Williams seems not to be priced for the plausible upside from either a renegotiated deal or a successful damages claim. With WMB shares past our prior buy limit we’re raising the bar to $23. ETE is in the Growth Portfolio while Williams is an Aggressive recommendation.

While there’s profit in the successful resolution of the merger dispute I’m also left with the sense of wonder for how needlessly destructive it has been for Energy Transfer investors first and foremost, and secondarily for Warren’s reputation.

It’s been reasonably suggested that future merger prospects will be reluctant to deal with someone so apparently unreliable. I’m more concerned about the degree to which Warren’s sweetheart distribution protection deal has undermined the trust of his own investors, and what it portends for his behavior in the future.

It’s one thing to seek a renegotiation of a regretted deal; quite another to put oneself ahead of one’s investors in the process, as Warren has with the terms of his private placement. So while Energy Transfer’s assets and short-term prospects continue to look attractive, it could take years for its reputation and that of its CEO to recover. And that makes ETE a ticker to date rather than an investment to marry.