Southern Union Co. is seeing its dance card beginning to fill up after Williams arrived late Thursday bearing a more lucrative merger package than one offered earlier this month by Energy Transfer Equity LP (ETE).
After the markets closed on Thursday Williams proposed to acquire Southern Union for a total enterprise value of $8.7 billion ($39/share) in cash, which is 18% higher than the $7.9 billion purchase price offered by ETE (see Shale Daily, June 17).
Williams' proposal was delivered via a letter to a special committee set up by Southern Union's board of directors specifically to consider alternative bids for the company. Williams' offer is 38% higher than Southern Union's closing share price ($28.26) the day prior to ETE's announcement on June 16, Williams said. No financing contingency is involved; Barclays Capital and Citi, which acted as Williams' financial advisers, said they are "highly confident" in Williams' ability to finance the all-cash price.
"Williams' proposal is compelling for both Southern Union and Williams investors," said Williams CEO Alan Armstrong. "Our proposal provides significantly greater value to all Southern Union shareholders than they would receive from Energy Transfer and a path to realize such premium value that is more transparent, more expedient and more certain.
"We are confident the combination will further strengthen our ability to deliver value and growth from an extraordinary suite of energy-infrastructure assets. The two asset portfolios are complementary and strategically positioned in growing supply areas, including key shale basins and end-use markets."
Friday proved to be a down day for the stock market, but that wasn't the case for Southern Union, where more than 28 million shares traded, compared with average volume of about 1.74 million. Southern Union for the day jumped 16.25% ($5.55) to close at $39.75. Williams stock price was off 2.57% (down 75 cents) to end the day at $28.49, but trading volumes also were heavy, with more than 20 million shares exchanged, well above the average 6.7 million. Meanwhile, ETE's share price fell 5.64%, losing $2.57 to close at $43.
Williams has pipeline operations both onshore and offshore in the United States and Canada. It operates almost 14,600 miles of interstate natural gas pipeline with design capacity of more than 11 Bcf/d. The company has seasonal storage capacity of more than 230 Bcf.
Most of Williams' pipeline and midstream assets were dropped down to Williams Partners LP, including its three major gas pipeline systems:
Williams' midstream unit includes nine gas processing plants, eight separation/dehydration/treating plants and 8,500 miles of gas gathering lines.
Armstrong said the combination "would enhance Williams' position as a North American leader in services that are vital to connect new supplies of natural gas in growing resource plays to markets that are anxious to enjoy the benefits of affordable, clean natural gas. Additionally, based on publicly available information, we expect to realize cost savings of more than $50 million annually and to immediately increase cash flows in support of Williams' high-dividend strategy."
The CEO said Williams was "confident" that Southern Union's management team and shareholders would find the higher offer "superior" to ETE's transaction, adding that he hoped to "quickly reach an agreement."
Williams is readying a plan to separate its exploration and production business, to be named WPX Energy, through an initial public offering in the third quarter. A subsequent tax-free spinoff to Williams shareholders is then to be completed by the end of March 2012. Acquiring Southern Union "has no impact on the timing of the separation transaction," the company said.
Armstrong indicated in the letter to Southern Union's board that he previously had spoken with two board members about a "potential combination" and his team had "spent significant time and effort studying your company and the potential benefits of an acquisition of the company by Williams. We view Southern Union's businesses as an attractive suite of stable assets that have long-term growth opportunities. The combination of Williams and Southern Union would create a premier pipeline operator with nearly 30,000 miles of regulated pipelines and a more diverse cash flow stream than either company currently enjoys."
The proposal, which has been approved by Williams' board, offers "a clearer and more expedient path to value realization with less risk and uncertainty than the proposed sale to Energy Transfer," said Armstrong. Williams already has "developed a comprehensive plan for securing all necessary regulatory approvals" and expects to be "in a position to consummate the proposed transaction on a timeline consistent with the proposed Energy Transfer transaction."
The proposed purchase price, Armstrong said, "is premised on Southern Union terminating the Energy Transfer transaction within the 40-day window established by your merger agreement with Energy Transfer for the lower breakup fee."
ETE responded to the counteroffer in a statement late Thursday and said it "believes its binding agreement provides superior value..." The offer, ETE said, "is not a $33/share offer as Williams contends. Rather, the ETE transaction is a tax deferred structure that provides SUG shareholders significant potential upside through at least an 8.25% annualized yield (paid quarterly) as well as the ability for SUG shareholders, at their option, to convert into ETE common units at a fixed exchange ratio of 0.770 times after the first anniversary of closing."
ETE said its agreement "has been unanimously approved by the boards of directors of both companies, is not subject to any financing conditionality or ETE unitholder approval and is not expected to result in any antitrust issues. In addition, ETE's transaction has been reviewed by all the credit rating agencies and is expected to have no ratings impact on the current ratings of SUG."
Energy analysts said Friday the counteroffer was appealing.
Because Southern Union is a Delaware corporation and its agreement with ETE "seems to imply Revlon duty, there is a likelihood it will go to the highest bidder," said CNBC's David Faber. "A Revlon duty occurs when, after a company agrees to a deal with a change in control of ownership, it is obligated to consider higher offers should they appear."
ETE's statement that its offer is "superior" isn't likely, Faber said. Unlike the Williams' offer, ETE's "offers no upside" in the first year after the transaction is completed. And many of Southern Union's current shareholders wouldn't be able to hold the master limited partnership (MLP) units offered by ETE because "as nontax paying institutions they can't hold up MLP units -- meaning they need to sell prior to close."
Analysts with Tudor, Pickering, Holt & Co. said an "interesting dynamic" was at work because ETE's offer was "clearly tailored to SUG management's tax concerns (8.25% convertible units could be exchanged for public ETE/ETP units without triggering gain on sale)," while Williams' offer "appeals to public shareholders who just want a higher value for SUG's business."
Even though Southern Union didn't shop the company before agreeing to the ETE deal, Faber said it set up a special committee to deal with any other bids "and set the breakup fee at a low 2.25% -- if, as has proved the case, it got another bid within 40 days."