Energy Transfer Equity LP (ETE) on Tuesday upped the ante for Southern Union Co., offering to pay $40/share, or a total of $8.8 billion, in a simplified cash-and-equity deal, which includes the assumption of debt. The offer is 42% higher than Southern Union's closing price on June 15, the last trading day before the original merger agreement was unveiled.
ETE last month offered $7.9 billion, including debt, to acquire the Houston-based pipeline company (see Daily GPI, June 17). Williams, based in Tulsa, responded with a $39/share bid, or $8.7 billion, which Southern Union's board of directors agreed to consider (see Daily GPI, June 29; June 27). Either merger agreement would create the largest natural gas pipeline company in the United States.
"We've been more aggressive here than we have been than probably in my whole career," ETE Chairman Kelcy Warren said Tuesday during a conference call with financial analysts.
Under ETE's new offer, already approved by both boards of directors, Southern Union shareholders could exchange each of their common shares for $40 in cash, or 0.903 ETE common units. ETE has secured $3.3 billion in committed financing from Credit Suisse to fund the cash portion of the offer.
Beyond the higher and more simplified offer by ETE, Southern Union's institutional shareholders may find the merger agreement more palatable because it gives them a choice of cash or equity, Warren noted. About 14% of Southern Union's shareholders, which include founder George Lindemann, have agreed to take the equity. The equity component of the bid, Warren told analysts, promises more upside than may be apparent to Southern Union's shareholders.
"I don't think this is a $40 offer," Warren insisted. "I think this is substantially more than $40."
Among other things ETE agreed to turn over to its general partner Energy Transfer Partners LP (ETP) the indirect interest in Citrus Corp. for $1.9 billion, which ETE would gain with the completion of the acquisition. Citrus, which owns the Florida Gas Transmission pipeline system, is jointly owned by Southern Union and El Paso Corp.
ETE also agreed to relinquish its rights to about $220 million of incentive distributions from ETP that it would be otherwise be entitled to receive over four years. ETP also received the right of first offer with respect to any sale of Southern Union's gas services unit.
The 5,500-mile Florida Gas Transmission system would provide ETP "with strategic access to the Florida market," said ETP COO Mackie McCrea. "Florida Gas supplied approximately 63% of the natural gas consumed in Florida last year, and its primary customers are utilities with strong investment-grade credit ratings."
In addition, the original agreement's five-year noncompete and consulting contracts with Lindemann and Southern Union COO Eric D. Herschmann were terminated. The five-year contracts would have given the two men $100 million collectively, as well as health care benefits and perquisites that included the use of private jets as well as offices in New York, Houston and Palm Beach, FL.
"We have listened to SUG shareholders and are providing a superior yet simpler transaction, including a significant cash component and the opportunity to benefit from ETE's upside through the ownership of ETE common units," said Warren, who is the company's largest unitholder. "The revised ETE/Southern Union agreement delivers superior value, highly compelling equity participation and certainty to close for SUG shareholders. The Southern Union board and I strongly believe that ETE is the right partner for Southern Union and that the combination of our companies is in the best interests of our investors, customers and employees."
No antitrust problems are expected under the merger offer, Warren said. However, Williams could be more scrutinized in Florida and other states where it shares a presence with Southern Union, he said. The chairman also emphasized the $3.3 billion in committed financing from Credit Suisse that ETE has in place, unlike Williams, which is relying on "highly confident" letters from its financial advisers. In connection with the merger agreement, ETE has received "signed support agreements" from shareholders representing 14% of Southern Union's total shares outstanding to trade for ETE common units.
ETE also agreed to sell some of its businesses to ensure federal antitrust approvals would not delay or prohibit closing the merger by early 2012. The Dallas-based company said it already has begun regulatory filings for the transaction.
Williams declined to comment.
"This deal creates strategic benefits that could not be achieved through any other industry combination," Lindemann stated. "Our businesses are highly complementary and the combination will provide a broader range of services and market access that our existing and future customers demand." There also is "greater certainty to close" the revised ETE merger.
However, more skirmishes may lie in wait. Southern Union's shares traded at around $41.50 early Tuesday afternoon, which could result in another competing bid. One caveat: ETE raised the break-up fee if Southern Union walks to $162.5 million. The original agreement set the break-up fee at $92.5 million for the first 40 days and $135 million thereafter.
ETE's new bid is "much more attractive" than the first "but we wouldn't be surprised to see Williams match/raise with [an] all-cash deal," said analysts with Tudor, Pickering, Holt & Co.
"There is no doubt that Williams has the capacity to continue bidding more," said BMO Capital Markets analyst Carl Kirst. "If Williams does decide to come out and counter, odds are it's not going to take just a dollar. They are going to have to put something out that once again establishes to Southern Union's bid that this is a superior offer."
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