Oneok-Southwest Merger Creates Largest U.S. Distributor
The combination announced last week of Oneok Inc. and Southwest
Gas Corp. would be the largest stand-alone gas distributor in the
United States, with Columbia Energy in second place, and the fourth
largest when gas and electric combination utilities are considered.
The combined company would have 2.6 million customers in five
states and would capitalize on Southwest's growth potential and
Oneok's strong balance sheet.
Last week, Oneok agreed to pay $28.50/share for Southwest Gas
common stock outstanding, valuing Southwest at about $1.8 billion,
including assumed debt. The transaction is expected to be accretive
in the first full year of operations. Oneok would be the primary
gas distribution company in Arizona, Kansas, Nevada and Oklahoma
and will also have a strong presence in California. Southwest Gas
currently provides gas to about 1.2 million customers in Arizona,
Nevada and California.
PaineWebber's Ron Barone called the deal a "win-win" and noted
Oneok would get Southwest for a price about 1.9 times its book
value when similar transactions have been priced at about 2.5 times
book value. In explaining the seemingly low price, Barone noted
some leverage to Southwest's balance sheet and the fact that
Southwest's earnings next year are expected to be about
$1.25/share, down from $1.70/share projected for the current year.
Last winter saw colder than normal temperatures in Southwest's
service territory, something not expected to happen again this
winter, Barone explained.
Larry Brummett, CEO of Oneok, said, "We believe the expertise of
Oneok as a fully integrated gas distribution company with gas
production, marketing and processing will create new opportunities
at Southwest Gas. Southwest Gas serves two of the fastest-growing
states in the country - Arizona and Nevada - and we look forward to
profitably developing this growth with our new partner."
Oneok has not identified any cost savings in any particular area
of the merger, said Oneok COO David Kyle. "We project the deal to
be accretive absent any kind of efficiencies." As for adding more
regulated assets, he said the company takes deals as they come,
whether they be for regulated or non-regulated assets.
Michael Maffie, CEO of Southwest Gas said, "The new company will
be solid financially with strong cash flow to enhance growth
opportunities in the rapidly expanding Southwest Gas service
territories and will minimize regulated business risks with the
diversified geographic exposure of five states."
The terms of the deal call for three Southwest Gas board members
to join Oneok's board, filling a current vacancy and two positions
that will be vacated due to retirements in 1999. Southwest Gas will
operate as a division of Oneok Inc. and will retain its name in the
local markets it serves. Brummett said, "The merger is not expected
to result in employee layoffs, and we would expect future employee
adjustments to be the result of attrition and/or voluntary
Southwest stock prices soared 9.7%, or $2.31 last Tuesday, when
the deal was announced, to $26.06/share, while Oneok stock prices
inched downward 1% to $33.19/share. The transaction is subject to
shareholder and regulatory approvals. It is expected to be
accounted for using the purchase method and is expected to close
during the fall of 1999.
"From our perspective the reason [for the merger] now is there
are two great plusses here," said Southwest spokesman Roger
Buehrer. "Southwest Gas is the fastest growing utility in the
country. We've been growing at an excess of 5% a year for the last
several years, and that's double the national average for gas
utilities. And [Oneok brings] an infusion of cash and financial
strength to the company, and this just made good sense. Two major
resources, growth and money, make a really strong company."
Oneok's regulated operations are conducted mainly through
Oklahoma Natural Gas and represented roughly 78% of operating
income before tax in the 1997 fiscal year. Last year Oneok
completed a strategic alliance with Western Resources, combining
the gas assets of both companies into Oneok. The $660 million
transaction made Oneok the nation's eighth largest LDC, serving
almost 1.4 million customers in Kansas and Oklahoma.
One day before announcing the Southwest merger, Oneok said it
had made a strategic alliance with Magnum Hunter Resources Inc. to
boost gas production and development opportunities for both
companies. Oneok will buy $50 million of Magnum Hunter convertible
preferred stock, becoming a 31% equity owner. Oneok will acquire
$10 million of Magnum Hunter's pending acquisition of Spirit 76,
including reserves and a gathering system.
The Southwest transaction is not expected to slow down Oneok in
making similar deals, Brummett said. "We have a number of deals in
the works even as we talk," he said during an analyst conference
call last week. "We have been continuously announcing the deals,
and again our criteria there is the same as it is on the regulated
side, that those deals must be accretive, and that makes it
difficult. It makes us work harder to find those kinds of deals.
It's a very good time to be buying if you have faith and confidence
in the long-term prospects of this business, as we do."
Joe Fisher, Houston