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Southern Union on 'Most Wanted' List

July 6, 2011
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An attempt by Williams late last month to snatch Southern Union Co. has forced Energy Transfer Equity LP (ETE) to strike back with a sweetened offer of $40/share.

ETE's revised bid includes $5.1 billion in cash and equity, as well as about $3.7 billion of Southern Union's debt.

"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.

ETE last month offered to buy Southern Union for $33/share, or a total enterprise value of $7.9 billion, in a transaction that allowed shareholders under certain circumstances to convert ETE units into cash (see Shale DailyJune 17). Williams responded with a counterbid of $39/share in cash, or $8.7 billion (see Shale Daily, June 30; June 27). Either merger would create the largest natural gas pipeline company in the United States.

Beyond the higher 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 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.

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.

No antitrust problems are expected under the merger offer, which has been approved by both ETE's and Southern Union's boards of directors. However, Williams could be more scrutinized in Florida and other states where it shares a presence with Southern Union, Warren 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. 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."

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.

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.

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