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Southwest Gas-Oneok Merger Lives On in Infamy

Southwest Gas-Oneok Merger Lives On in Infamy

Recriminations, investigations and large dollar lawsuits were flying last week in the wake of the failed Oneok-Southwest Gas merger.

In the latest development, Southwest filed lawsuits against Oneok, Inc. and Southern Union Co. following what it called "Oneok's unjustified attempt to cancel the merger agreement between it and Southwest Gas." Southwest is reportedly suing for $1.8 billion in damages. A hearing is scheduled for Feb 4 at the Arizona Corporation Commission, in which Oneok's motion to close the merger docket will be considered.

The lawsuit, filed last week in the U.S. District Court for the District of Arizona in Phoenix, seeks payment from Oneok for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud in the inducement, and fraud related to its actions connected to the merger agreement and its cancellation of the agreement.

Southwest Gas also has sued Southern Union Co. seeking payment from Southern Union for breach of contract, breach of the implied covenant of good faith and fair dealing, and interference with a contract, all related to Southern Union's attempts to block the proposed Southwest Gas-Oneok combination after Southern Union's unsolicited offer was rejected by Southwest Gas in favor of Oneok's offer.

Meanwhile Arizona Corporation Commission Chairman Carl Kunasek, has sent a letter to Southwest, saying that the ACC is reviewing the situation in search of any improprieties the utility may have committed. "The failed merger has brought hardship to Southwest Gas' customers and shareholders and created additional and unnecessary conflict here at the commission," Kunasek said in the letter. "A full review is in order."

Oneok said earlier this month that its board of directors voted to terminate the merger. The termination decision was made pursuant to a provision in the merger agreement that permitted any party to terminate if certain conditions were not fulfilled by December 14, 1999.

"We worked very hard to make this deal happen," said Oneok CEO Larry Brummett, "but the bottom line is that even if we assume that all regulatory approvals could be received in a timely manner, there is simply too much financial risk associated with Southwest Gas right now and we have a responsibility to protect our shareholders from excessive risk."

Brummett expressed financial concerns about Southwest, citing pending claims against Southwest in a lawsuit filed by Southern Union, an Austin, TX, natural gas distributor that made a competing, unsuccessful bid to acquire Southwest. That lawsuit, filed in July 1999, subsequent to the signing of the merger agreement, was recently highlighted by Arizona regulatory staff as a reason not to recommend approval of the merger.

The deal had already received unanimous regulatory approval in Nevada and had been recommended by the regulatory staff of the Public Utility Commission for approval in California.

Brummett said Oneok had been focused heavily on the Southwest Gas merger for the past 12 months, but that Southwest's potential multi-million dollar liability was too much risk for Oneok to assume.

Southern Union, meanwhile, is continuing with its role as the attacker, saying it still is proceeding with plans to sue Southwest and others.

"In light of the ongoing investigations, we were not surprised by Oneok's announcement...that it is no longer pursuing a merger with Southwest Gas," said Eric Herschmann, Southern Union's trial counsel. "Our position remains unchanged - we have no intention of acquiring Southwest Gas, and we will vigorously continue to pursue our legal remedies against Southwest Gas and others. We are confident that the disclosure of additional facts will further strengthen Southern Union's claims." The lawsuit calls for $750 million in damages.

Southern Union gained permission in May to join an existing lawsuit against Southwest Gas in a last-ditch attempt to overtake Oneok. The lawsuit originally accused Southwest Gas' board of directors of refusing to negotiate with Southern Union in good faith.

The lawsuit turned ugly soon thereafter. At one point Oneok even filed to hold Southern Union in contempt of court. However, Oneok and Southwest Gas were unable to stem Southern Union's allegations, which grew from accusing Southwest Gas to involving ACC Commissioner Jim Irvin. This, in turn, prompted a criminal investigation by the FBI, the U.S. Attorney's Office and the Maricopa County (AZ) Attorney's Office. These investigations are still ongoing.

Southwest accepted Oneok's initial merger offer in November 1998. The boards of both companies signed the deal after Oneok sweetened the offer from $866 million to $912 million. Southern Union had offered a hostile bid in February of $32/share, or $973 million, and then increased its bid to $33.50/share, or over $1 billion.

The combined company would have had 2.6 million customers in five states. The merger would have created the largest stand-alone gas distribution network in the U.S.

John Norris

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