Southern Union Bid War May Pit Institutional Investors Against Executives

A multibillion-dollar takeover battle for Southern Union Co. (SUG) may pit institutional investors against the pipeline company’s top two executives, analysts said.

Williams Cos.’ unsolicited $4.86 billion all-cash bid yesterday for Southern Union would benefit shareholders who don’t want to see their stock converted. Southern Union’s chief executive officer and president, who together own or control about 13 percent of the company, stand to gain the most if a $4.12 billion share swap proposed by Energy Transfer Equity LP (ETE) last week is successful.

The Williams offer represents a 38 percent premium to Southern Union’s share price on June 15, before either bid was announced. Energy Transfer’s offer, with a 17 percent premium, would force investors to sell or convert their Southern Union shares to partnership units.

As a master-limited partnership, or MLP, Energy Transfer was set up to own long-term assets like pipelines that pay steady returns. It pays no federal income taxes and its payments to investors are often tax-deferred for individuals.

Institutional investors such as pension funds, which are already tax exempt, frequently have barriers to owning MLP units. That would mean those investors, which make up 77 percent of Southern Union’s shareholders, may have to sell their shares if Energy Transfer wins the bidding.

Management Price

“The internal tension here is basically between those who can own MLP units and those who can’t,” said Carl Kirst, an analyst at BMO Capital Markets in Houston. The perception is that Southern Union’s “management got a far superior price than shareholders in general,” Kirst, who rates Southern Union market perform and doesn’t own the shares, wrote in a note to clients.

Southern Union, based in Houston, rose $5.70, or 17 percent, to $39.85 at 4:03 p.m. in New York Stock Exchange composite trading. Williams fell 68 cents, or 2.3 percent, to $28.55. Energy Transfer fell $2.51, or 5.5 percent, to $43.06, the biggest drop in more than two years.

Energy Transfer’s offer may provide a better long-term payoff to individual investors who would benefit from the MLP tax structure, said Darren Horowitz, an analyst with Raymond James & Associates Inc. in Houston.

Investors can earn a dividend while the transaction is pending, and they would also have a stake in Energy Transfer’s future, said Horowitz, who rates Dallas-based Energy Transfer’s units “outperform” and doesn’t own them.

Severance Payments

Southern Union Chairman and CEO George Lindemann is entitled to severance payments and other benefits worth an estimated $21.2 million under certain circumstances if the company is sold, according to a March 25 regulatory filing. President Eric Herschmann is entitled to $25 million under the same circumstances, the company said.

Both executives have consulting and non-competition contracts with Energy Transfer that will pay them each $10 million a year for the next five years, according to regulatory filings.

“That’s a big number,” said Charles Elson, a law professor and director of the University of Delaware’s Weinberg Center for Corporate Governance. Southern Union’s board has a legal obligation to accept the best offer and “if payments to the CEO diminish the offer, then there’s a problem.”

Lindemann’s 2010 salary and bonus amounted to $7.7 million and Herschmann’s was $7.3 million, according to Bloomberg data.

Largest Shareholder

Lindemann has been CEO since 1990 and is Southern Union’s largest individual shareholder, according to Bloomberg data. The former mobile-phone entrepreneur has an estimated net worth of $1.7 billion, according to Forbes magazine.

Herschmann, who became president in 2008, also serves as a law partner at the Kasowitz Benson Torres & Friedman LLP law firm, which provided $8.8 million worth of legal work for Southern Union in 2010, according to a regulatory filing.

Jeff Pounds, a spokesman for Tulsa, Oklahoma-based Williams, declined to comment on Southern Union’s severance agreements.

“We’re focused on the cash purchase price, which is paid to all shareholders,” he said. The Williams offer values Southern Union at $39 a share, while Energy Transfer would issue units worth $33 for each Southern Union share.

Under the Energy Transfer sale agreement, Southern Union must pay its former suitor $92.5 million if it accepts a higher offer before July 25 and $135 million if it does so after that date.

Interstate Pipelines

Both Williams and Energy Transfer want to use Southern Union’s lines to connect to customers in Florida and to new sources of natural gas in Texas and Oklahoma.

Southern Union operates 15,000 miles (24,000 kilometers) of interstate pipelines, a terminal to import liquefied natural gas and systems that serve a half-million gas customers in Missouri and Massachusetts.

If Williams’s bid is successful, it would become the largest interstate gas shipper, with a capacity of 22 billion cubic feet a day, CEO Alan Armstrong said yesterday. Energy Transfer would nearly double in size if its offer wins.

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net

Zachary R. Mider in New York at zmider1@bloomberg.net;

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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