Top shareholder to vote against $1.8 billion Southwest Gas merger

David Strow

Monday, July 26, 1999 | 11:34 a.m.

Southwest Gas Corp.'s largest shareholder says he will vote against the Las Vegas company's proposed $1.8 billion merger with ONEOK Inc.

Mario Gabelli, who controls a group of investment funds in Rye, N.Y., said in a Securities and Exchange Commission filing Thursday that he intends to vote his shares against the merger at the Aug. 10 shareholder's meeting. Gabelli's funds control 3.07 million shares of Southwest stock, representing 10 percent control.

"Your board's conclusion that the ONEOK transaction was better for shareholders is wrong," Gabelli said in a letter to Michael Maffie, chief executive of Southwest. The letter was included in a recent proxy filing with the SEC. "My clients prefer a fully financed offer that more than compensates for any bureaucratic delays.

"I cannot vote my client shares for the ONEOK offer."

Gabelli said he'd attempted to communicate his concerns to Maffie prior to sending the letter, but was never called back.

"I guess he's been too busy with the merger," Gabelli said. "We need to protect our clients' rights. Everything we see indicates the price is too low."

Lew Phelps, a spokesman for Southwest Gas, said that Southwest executives have been in communication with Gabelli since February, when he first voiced concerns over the ONEOK bid.

"While Southwest Gas would appreciate Mr. Gabelli's support, we do not expect that his decision will change the outcome of the shareholder vote," Phelps said. "Thirty dollars in the hand that is sure is a whole lot better than any other offer that is highly uncertain."

ONEOK's offer of $30 a share was topped by Southern Union Co., which bid $33.50 per share on April 27 following the rejection of its first offer for Southwest. For Gabelli, the Southern Union offer is worth an additional $4.6 million.

Gabelli indicated that he was considering exercising dissenters' rights for his shares. In theory, that could kill the merger.

Dissenter's rights is a legal demand by a large shareholder that a court determine the "fair market value" of his or her shares. It is exercised when a shareholder believes the price of a buyout is too low. These rights will become available if 5 percent or more of the outstanding shares demand them; Gabelli, with 10 percent, could force dissenters' rights alone.

"It is a condition (of the merger agreement) that demands for dissenter's rights not be made by 5 percent or more of the Common Stock," Southwest stated in a June 30 filing with the SEC. "Unless this condition is waived by both parties, the merger will not be consummated if dissenters' rights are available."

But it's considered likely that both Southwest and ONEOK would waive this condition if Gabelli filed for dissenters' rights, rather than jeopardize the deal.

Gabelli's dissatisfaction with the deal is just one of a string of recent difficulties that has emerged in trying to close the deal. Last week, Southern Union filed a racketeering and fraud lawsuit against Southwest Gas, ONEOK and two Arizona regulators, accusing them of conspiring to derail the Southern Union offer in favor of ONEOK's lower bid.

Southwest, ONEOK and the Arizona regulators have denied wrongdoing, calling the action meritless.

That lawsuit alleges that Gov. Kenny Guinn, the former chairman of Southwest Gas, was lobbied by Arizona Corporation Commissioner Jim Irvin to turn the Public Utilities Commission of Nevada against Southern Union.

Guinn, the lawsuit said, refused to contact Nevada regulators "because he was the former chairman of Southwest and there would be an obvious appearance of impropriety." The suit says he did, however, send a letter to Southwest CEO Michael Maffie expressing concerns about Southern Union's offer, a letter Southern Union says was written by Irvin.

Southern Union did not accuse Guinn of any wrongdoing.

Guinn's press secretary, Jack Finn, said there was "no attempt to get the governor to lobby on anyone's behalf." Finn also denied that the governor had forwarded any letter from Irvin to Southwest or the PUCN.

Guinn did meet with Irvin, but Finn described this meeting as a "courtesy visit" to inform the governor of regulatory proceedings in Arizona, rather than an attempt to lobby the governor.

The lawsuit alleges that Irvin drafted a letter March 8, to be sent from the heads of the public utility commissions of Arizona, Nevada and California. The letter, to be sent to Southwest's board of directors, implied that all three commissions had "serious concerns" about the Southern Union offer, according to the lawsuit.

The lawsuit claims that Irvin and Jack Rose, former executive secretary of the Arizona Commission, met with Guinn in March in an attempt to "convince Gov. Guinn to actively lobby the PUCN in favor of ONEOK over Southern Union. On or about March 30, 1999, Gov. Guinn sent a copy of the (Irvin) letter to Maffie."

The lawsuit said that Irvin also convinced Richard Bilas, president of the California Public Utilities Commission, to send a letter to Southwest's board based on the Irvin letter. The final Bilas letter, dated March 29, had signature blocks for Irvin, Bilas, and Judy Sheldrew, then PUCN chairwoman. Bilas' office was told by Rose that he would obtain Irvin's and Sheldrew's signatures, Southern Union alleges.

The Nevada PUC says no contact ever occurred with Irvin or Rose.

Protests by CPUC staff and other commissioners convinced Bilas against sending the letter, the lawsuit said. On April 5, Irvin sent a draft of this letter -- which Bilas and Sheldrew did not sign -- to Maffie and Southwest Chairman Thomas Hartley. The lawsuit claims "Maffie and Hartley would then submit Irvin's letter to the Southwest Board to mislead the Board into voting for a ONEOK merger over a Southern Union merger on the false assumption that a Southern Union merger would face regulatory problems."

"In the (letter) Irvin falsely represented that: 'I also have spent a considerable amount of time discussing these factors with my colleagues at the Nevada and California utility commissions, and advise you that they share my concerns,"' the lawsuit said.

When Southwest rejected Southern Union's offer in April, it cited regulatory concerns as a key reason for its decision.

A Southwest Gas director told the Sun that the board had received a letter from Irvin while it was considering the Southern Union offer.

Manny Cortez, head of the Las Vegas Convention and Visitors Authority and a Southwest director, said the Irvin letter expressed concerns about Southern Union's regulatory history. He denied, however, that the letter indicated regulators in other states would also vote against the merger.

Cortez declined further comment.

"All I can say is, yeah, there was a letter (from Irvin)," he said.