Southern Union gained permission last week to join an existinglawsuit against Southwest Gas in a last-ditch attempt to overtakeOneok as the winner in the race to merge with Southwest. Thelawsuit accuses Southwest Gas’ board of directors of refusing tonegotiate with Southern Union in good faith. Despite the SouthernUnion lawsuit filing, Southwest reaffirmed its acceptance of theOneok offer.

The original lawsuit was filed recently by Southwestshareholders in San Diego County’s Superior Court. Southern Unionsaid the original lawsuit accuses the Southwest board of seekingonly to protect itself during the past merger negotiations.

In joining the lawsuit, Southern Union is asking the court forpermission to directly solicit Southwest’s shareholders to opposethe Southwest-Oneok agreement and to support Southern Union’sefforts to merge. The suit also asks for a temporary restrainingorder and a preliminary injunction to stop further progress on themerger between Southwest and Oneok during the course of thelitigation. Southern Union has also asked for compensatory andpunitive damages.

Southwest accepted Oneok’s initial merger offer last November.The boards of both companies signed the deal last week after Oneoksweetened the offer from $866 million to $912 million. SouthernUnion had offered a hostile bid in February of $32/share and thenincreased its bid to $33.50/share.

George L. Lindemann, CEO of Southern Union, said, “There is noconceivable business reason for the management and board ofSouthwest to reject our offer. I believe Southwest’s shareholdersdeserve the right to be heard on our offer, which provides themmore than $108 million in additional value. Now it is time to letthe shareholders themselves — not the board — decide what is intheir best interests.”

The lawsuit also alleges that Southwest Gas induced SouthernUnion to sign a standstill agreement before their negotiationsstarted, preventing Southern Union from openly soliciting Southwestshareholder approval for its proposal. The standstill agreement wasenforced on April 30.

“Southwest tried to use the courts [by enforcing the standstillagreement] in an attempt to keep us from speaking directly to theirshareholders” Lindemann said. “Why are they afraid to let their ownshareholders hear both sides of the story? Why not let them make uptheir own minds?”

Lindemann’s plea fell upon deaf ears at Southwest. “The boardrecognized that a potential combination with Southern Union facessignificant regulatory obstacles,” Michael Maffie, CEO of Southwestsaid. “Given the highly leveraged capital structure of bothSouthwest Gas and Southern Union, combined with the regulatorydifficulties faced by Southern Union in other states, the boardconcluded that obtaining regulatory approval, with achievable andacceptable conditions, is far too unlikely to justify abrogation ofour existing agreement with Oneok in favor of the Southern Unionbid.”

In related news, Southwest Gas, which provides gas to about 1.2million customers in Arizona, Nevada and California earned a netincome of $28.3 million in the first quarter of 1999, which wasdown $7.7 million from the same period in 1998. Maffie said theresults were in line with expectations.

“The impact of weather was offset by customer growth, ratedesign improvements, lower financing costs and contributions fromour construction services subsidiary. However, the positive firstquarter results were overshadowed by the record earnings achievedin the first quarter of 1998, when weather conditions were colderthan normal.”

John Norris

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