Analysts are getting edgy about Southwest Gas merger prospects

David Strow

Friday, Nov. 26, 1999 | 11:05 a.m.

Utilities analysts are growing increasingly edgy about the likelihood of success for the merger of Las Vegas-based Southwest Gas Corp. and ONEOK Inc., following a stream of new developments from investigators in Arizona.

Both companies, meanwhile, continue to insist their merger will eventually succeed.

"I give a 50-50 chance of this merger going through," said Zach Wagner, an analyst with Edward Jones & Co. in St. Louis. "The longer the delays, the more uncertainty there is. Delays are not good in the utility industry, and it generally means the merger is in trouble."

In the latest development in the case that has paralyzed a $1.8 billion deal, FBI agents Tuesday searched the home of former Arizona Corporation Commission Executive Secretary Jack Rose. The agents were searching for any documentation about business relationships between Rose and Southwest Gas, ONEOK and Prudential Securities.

The FBI is one of three government agencies involved in criminal investigations of Rose. The investigation is tied to claims that Rose used his former position in Arizona for personal financial gain, and to the detriment of another suitor of Southwest Gas.

"What's important to know is the fact that execution of a warrant doesn't reflect anyone's finding or conclusion that anyone has committed a crime," said John Hannah, Rose's attorney. "There are two sides to this story. There will be a time and a place for Mr. Rose to tell his side, and he will.

"Folks should not make any judgments about what happened."

But these claims, first raised in a federal racketeering lawsuit by spurned Southwest Gas suitor Southern Union Co., have led to repeated delays in Arizona regulatory hearings. The ACC was first scheduled to hold hearings on the merger in September, but have delayed these hearings repeatedly to allow the gathering of more information. Hearings are now scheduled to move forward in early February.

This has put analysts in the uncomfortable position of trying to guess which way the ACC will vote -- or where the criminal investigations will eventually lead.

"It's tough, because a lot of this isn't coming out in the national media," said Michael Garvey, an analyst covering ONEOK for CIBC World Markets in New York. "The local papers are doing all the digging here, and the wire services are doing nothing. We're sniffing around, talking to the companies, but with companies, you always get a spin."

Southwest Gas investors appear to be as uncertain. The company's stock fell $1.06 Wednesday, closing at $23.25. That's a 25 percent discount over the $30 per share price offered by ONEOK.

At this point, Garvey said ONEOK needs to consider whether it wants to continue the pursuit at all.

"It's a tough call at this point to make," Garvey said. "There's a limit to how many delays they can really take.

"At some point, if this is not going to close, they have to be able to pursue other growth opportunities. This deal does work if it goes through, but it depends on how much cost is added in for this activity."

ONEOK stock has traded around the $30 level for months, and has dropped in recent days below $28. Meanwhile, Garvey said, similar natural gas companies have enjoyed gains in their stock price.

"This is weighing on the stock," Garvey said. "There was a nice run (in the sector) awhile back that they did not participate in.

"I still think you're looking at better than 50-50 to close."

ONEOK and Southwest Gas continue to say their merger is still on.

"This development (the FBI search) should have no effect on the merger," said Southwest Gas spokesman Lew Phelps. "The merger brings substantial benefits to the customers of Southwest Gas in Arizona and elsewhere, and we believe the Arizona Corporation Commission should ultimately approve it."

ONEOK spokesman Don Sherry said the FBI's move may actually be a positive for the companies.

"There's not a great deal of surprise at all that there was an effort to look for documents," Sherry said. "To the extent that it advances the investigation, and brings us closer to any kind of resolution, so much the better.

"We are going to continue to vigorously pursue the merger with Southwest Gas, and this will have no impact on this at all."

Though they're growing uncertain whether or not ONEOK and Southwest will merge with each other, analysts are confident both will be involved in deals eventually.

"Southwest will be bought by somebody, even if it's not ONEOK," Wagner said. "It's a very attractive gas utility, and there are 10 to 12 other utilities in North America interested in buying them if the ONEOK deal collapses."

Garvey agreed, and said that Southwest Gas would probably still be able to fetch an offer similar to ONEOK's, even if the ONEOK merger dies.

"This is a company that did put itself up for sale," Garvey said. "The likelihood is someone else would step up at the $30 (per share) price range, give or take.

"But ONEOK does have other things to invest in."