Southwest Gas must analyze merger issues

Tuesday, Feb. 23, 1999 | 10:29 a.m.

An analyst says Southwest Gas Corp. will need to evaluate long-term growth issues while it mulls over what appears to be a superior acquisition deal that surfaced on Monday.

Zach Wagner, a natural gas analyst with Edward Jones & Associates in St. Louis, said Southwest is an expensive utility to operate because of costs to keep up with growth in its markets of California, Nevada and Arizona.

"That's why they teamed up with ONEOK (Inc., of Tulsa, Okla.)," Wagner said. "They have bigger pockets to handle the growth."

ONEOK, a company that would create the largest stand-alone gas distribution company in the United States serving 2.6 million customers in five states with the Southwest deal, offered $28.50 a share for the Las Vegas-based company in December. The $1.8 billion deal includes $864 million in stock and the assumption of $910 million in debt.

But on Monday, Southern Union Co. of Austin, Texas, offered $32 a share in cash on basically the same deal. The Southern Union bid offers a $1.85 billion package with the stock valued at $970 million. Representatives of all three companies say the two offers are virtually the same except for the price.

Another aspect of the ONEOK deal is a $30 million termination fee. If the deal announced in December collapses, Southwest Gas would be responsible for paying that to ONEOK, according to documents filed with the Securities and Exchange Commission.

State Consumer Advocate Fred Schmidt said today there is no precedence in Nevada for ratepayers being held responsible for paying contract termination fees. However, he said it would not surprise him if Southwest Gas made a case for asking ratepayers to pay if the overall savings of the merger deal benefitted consumers.

That, in essence, is what Nevada Power argued when it sought approvals from the the Public Utilities Commission in its merger with Sierra Pacific Resources Inc. The company argued that cost savings of the merger would be great enough to cover costs of a premium paid to shareholders.

Schmidt said Southwest Gas "owes it to shareholders to investigate" whether the Southern Union offer is superior, even with the $30 million payment to ONEOK.

Wagner said possibly the most unusual aspect of the Southern Union offer is that the acquiring company is smaller than the target.

"I was surprised by the deal, primarily because Southern Union is smaller than Southwest Gas," Wagner said. "It takes a lot of financing and capital resources in order to make a proposal like this work."

Wagner said that's another reason why Southwest has to study the long-term implications of the offer.

"If they (Southern Union) have to bring on a lot of debt to make this work, will they be able to finance customer growth?" Wagner asked. "Maybe yes, maybe no."

Wagner said he was not surprised that ONEOK stood firm on its original offer.

"That's the right strategy for ONEOK," Wagner said. "They don't know if this offer has any merit. They'll see what transpires between Southwest and Southern Union. Southwest Gas has a fiduciary responsibility to its shareholders to review the offer.

"Then, they'll come back with an announcement as to if the offer deserves merit or not. At that point, you'd probably see some kind of announcement from ONEOK as to whether they plan to stay in the running," he said.

The biggest benefactors will be current shareholders, he added.

"I'm telling investors to stay with Southwest Gas stock," Wagner said. "The best thing they can do is sit back and watch the fireworks."

Monday was a day for fireworks in Wagner's field of expertise. There were two other major deals involving gas utilities. While the Southern Union-Southwest announcement was intriguing to Wagner, the other deals were bigger.

Dominion Resources Inc. announced it wants to acquire Consolidated Natural Gas Co. of Pittsburgh for $6.3 billion in stock, which would create the nation's fourth-largest electric and gas utility.

And, Sempra Energy, which was formed in a merger of two California utility companies, announced plans to buy KN Energy, a natural gas company, for $1.8 billion in stock and cash.

Customers aren't likely to see a difference in service regardless of which company is the successful bidder. Both ONEOK and Southern Union say they'll maintain a division headquarters in Las Vegas and the company would continue to operate under the Southwest Gas name. Both companies have no plans to reduce the level of employees in the city.

Representatives of Southwest Gas said on Monday they would have no comment on the Southern Union offer until it either was accepted or rejected.

ONEOK management issued a statement saying they were surprised by the Southern Union bid, but they weren't planning to change their original offer.

"We believe our offer is fair, competitive and still valid," said ONEOK Chairman Larry Brummett.

Wall Street held a favorable view of the Southern Union bid. Southwest Gas stock climbed $1.75 to close at $28.375 on trading of 101,400 shares. That's about 29 percent above the daily average. This morning, the stock was at $28.75, up 37.5 cents, nearly at its 52-week high price of $29.

Southern Union stock was at $19.625, down 37.5 cents in light trading at about the middle of its 52-week range.

ONEOK is down 50 cents to $26.875, just over its 52-week low of $26.69.