Traders who profit from acquisitions are betting the bidding war for Southern Union Co. (SUG) will drive the deal price up more than any other U.S. takeover as Energy Transfer Equity LP (ETE) and Williams Cos. battle for gas pipelines.
Energy Transfer sweetened its offer for Southern Union yesterday to an average of $40.25 a share in cash or stock, trumping the $39 a share bid from Williams. Southern Union closed 4.5 percent higher than the latest offer yesterday, the widest gap of any pending U.S. deal with an equity value greater than $1 billion, signaling traders are wagering a further increase is needed to acquire the Houston-based company, according to data compiled by Bloomberg.
Williams and Energy Transfer covet Southern Union’s 15,000 miles of natural-gas pipelines, particularly in Florida, as the disaster at Japan’s Fukushima plant curtails demand for nuclear power and coal producers face environmental regulations, according to WallachBeth Capital LLC. While arbitragers are projecting a higher price for a company that’s already more expensive than 95 percent of its peers relative to earnings, a counterbid from Williams must top $42 a share to cover a richer breakup fee with Energy Transfer, said Oscar Gruss & Son Inc.
“People are anticipating another bid,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth. “Nuclear is not going to be big going forward, and nobody wants a coal-fired plant built in their neighborhood. That’s why everybody wants these assets so badly. The rational me says the price is reaching its maximum, but I also know from experience that you could see something crazy.”
‘Evaluating Our Options’
John Barnett, a spokesman for Southern Union, didn’t return a telephone call seeking comment. Mark Palmer, a spokesman for Energy Transfer, didn’t respond to a telephone call or e-mail.
Jeff Pounds, a spokesman for Williams, said yesterday that the company is “evaluating our options.” He declined to comment further and referred to the company’s June 23 statement announcing its offer for Southern Union.
Energy Transfer, based in Dallas, boosted its agreement with Southern Union yesterday to $40 in cash or 0.903 common shares for each share owned. Based on a maximum cash portion of 60 percent, the takeover was worth an average of $40.25 as of yesterday’s close. The deal, which now has $3.3 billion in committed financing from Credit Suisse Group AG, is valued at about $8.8 billion including $3.7 billion in net debt, data compiled by Bloomberg show.
With a $10 billion market value, Energy Transfer had to increase its original June 16 all-stock offer after Tulsa, Oklahoma-based Williams submitted a counterbid of $39 a share in cash on June 23. The competing proposal from Williams, which has a market capitalization of $18 billion, trumped Energy Transfer’s first bid by 18 percent, valuing Southern Union at $8.6 billion including net debt.
The boards for Energy Transfer and Southern Union already approved the combination, which also has support from 14 percent of Southern Union’s shareholders, who intend to choose stock instead of cash payment, according to a statement yesterday.
Southern Union shares climbed $1.70 after the announcement to $42.07 yesterday, giving the company a market value of $5.2 billion. The stock closed about 4.5 percent higher than the average value of Energy Transfer’s offer, indicating investors expect Williams to respond with another bid.
Shares of Southern Union climbed 0.5 percent to $42.26 at 10:04 a.m. in New York today. Energy Transfer slipped 0.2 percent to $44.89, while Williams dropped 1 percent to $30.37.
“The reaction now is that Williams is going to come back,” said Kathleen Renck, vice president of merger research at Wall Street Access in New York. “Williams has got to ask themselves how high they have to go.”
Williams, which is rated the lowest level of investment grade by Moody’s Investors Service and Standard & Poor’s, can afford to pay as much as $42 a share in cash if it decides to counter, said Kevin Shacknofsky, who helps manage $7 billion in Purchase, New York, for Alpine Mutual Funds. Energy Transfer is rated one level below investment grade by Moody’s and three levels below by S&P.
“They both seem like motivated bidders,” Shacknofsky said. “But the fact that Williams has a better balance sheet and can afford to pay more all in cash, that means you’d expect them to be the winner.”
If Williams were to raise its offer by $3, Energy Transfer “would really be hard pressed to match that,” said WallachBeth’s Oshodi. He said the acquisition may close between $42 and $44 a share.
Texas to Florida
Energy Transfer and Williams are vying for Southern Union’s pipelines that bring gas from Texas and the Gulf Coast to markets in Florida and the Midwest after Japan’s biggest earthquake on March 11 spurred the worst nuclear disaster since Chernobyl 25 years ago.
In April, NRG Energy Inc. (NRG), a U.S. independent power producer, halted its plans to build two new reactors at a Texas nuclear plant. The company cited diminished prospects after the earthquake and tsunami knocked out cooling systems at Tokyo Electric Power Co.’s Dai-Ichi plant, leading to the spread of radiation across parts of northern Japan.
The Obama administration has identified energy sources such as natural gas, nuclear, wind and solar as “clean” because they produce lower emissions of carbon dioxide and other pollutants than sources such as coal or oil. In March, the Environmental Protection Agency proposed regulations to limit the toxins spewed from coal-fired plants. Now, natural gas may be the preferred power generator, WallachBeth’s Oshodi said.
‘Whole New Need’
“If there’s a shift from coal to natural gas over the next five to 10 years, there’s going to be a whole new need for natural-gas pipeline infrastructure,” said Gordon Howald, an analyst at East Shore Partners Inc. in Hauppauge, New York. “Having scale and scope would better enable a company to compete for those projects.”
Energy Transfer, which owns the largest intrastate system in Texas, has assets close to Southern Union’s natural gas conduit that runs from the biggest gas-producing state and spans Florida. Adding its lines will almost double Energy Transfer’s network. Williams’s Gulfstream pipeline, a partnership with Houston-based Spectra Energy Corp. (SE), already supplies natural gas to parts of Florida.
Demand for natural gas grew 5.7 percent last year, the biggest gain since 2007, according to the U.S. Department of Energy.
After Williams’ competing bid last month, investors including KBC Asset Management NV sued Southern Union for not properly shopping around for higher bids and structuring the original deal with Energy Transfer in a way that discouraged other offers.
Southern Union Chairman and Chief Executive Officer George Lindemann and Chief Operating Officer Eric Herschmann voluntarily terminated consulting and non-compete agreements that would have paid each executive $50 million over five years. Also, Energy Transfer is now offering standard equity units instead of issuing new series B preferred shares, Chairman Kelcy Warren said on a conference call yesterday.
Southern Union agreed to a higher termination fee of $162.5 million and may also owe as much as $50 million in expenses if it calls off the deal with Energy Transfer, according to a regulatory filing yesterday. Covering those costs means Williams would have to increase its offer by at least $2 to more than $42 a share, which may be “more than Williams is prepared to bid,” said Bill Kavaler, a special situations analyst at Oscar Gruss in New York.
If Williams does counterbid, Kavaler said Energy Transfer would have a “really hard time” making a better proposal.
‘Not Our Style’
“They are already paying more than they want to and more than many of their shareholders are pleased or comfortable with,” Kavaler said of Energy Transfer.
Energy Transfer’s Warren declined to say if the partnership would top a higher bid by Williams.
“It’s not our style to get into true auctions,” Warren said in an interview yesterday. “We know these assets fit us better by far than any other party.”
Southern Union already trades at 23 times its earnings in the last 12 months, more expensive than any other U.S. gas distributor with the exception of Williamsville, New York-based National Fuel Gas Co. (NFG), which is valued at 29 times earnings, data compiled by Bloomberg show.
“These are the markets that are going to grow much faster than other ones, so there’s demand,” said Helena Derr, a utility and energy analyst at Stewart Capital in Indiana, Pennsylvania, which oversees $1 billion. “Whoever has the money will probably step up and buy. In most cases, the higher bidder takes it all.”
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