Southern Union drops its bid for takeover of Southwest Gas

David Strow

Wednesday, Oct. 6, 1999 | 11:21 a.m.

New Deal

Southern Union Co. said Tuesday it's acquiring a natural gas company in Massachusetts for $75 million.

Under terms of the deal, Southern Union will pay $23.50 per share in cash and stock. The $75 million transaction value includes the assumption of debt. The company serves 48,000 customers in southeastern Massachusetts.

Southern Union is also currently working to close the acquisition of Pennsylvania Enterprises Inc. of Wilkes-Barre, Pa. for $500 million. Once the two transactions close, Southern Union will serve 1.3 million customers in five states.

Southern Union Co. is dropping its hostile takeover bid for Southwest Gas Corp. of Las Vegas.

Southern Union, based in Austin, Texas, had offered as much as $33.50 per share, or $1.88 billion, for Southwest Gas. But its offer was spurned by Southwest in favor of ONEOK Inc.'s $30 per share cash offer.

Southern Union said Tuesday it's no longer interested.

"Our offer is no longer on the table, and our only interest is vigorously pursuing our damage claim," said Southern Union Treasurer George Yankowski, referring to the Texas company's $750 million racketeering lawsuit against ONEOK and Southwest that is pending in Arizona federal court. "Our offer was rejected."

He declined further comment.

Southern Union hasn't been seen as a serious contender for Southwest for some time, particularly after Southwest's shareholders voted for the merger with Tulsa, Okla.-based ONEOK Aug. 10. Until Tuesday, however, the company has insisted it was still continuing the fight. In this week's Forbes magazine, Southern Union Chairman George Lindemann was quoted as saying the Southwest battle wasn't yet decided.

"Forbes decided I have lost before the count," Lindemann told the magazine. "We will prevail."

Southwest dismissed the statement as old news.

"This is not news to Southwest Gas," said company spokesman Lew Phelps. "The board of Southwest Gas rejected the Southern Union offer months ago, and that took it off the table. Then the shareholders of Southwest Gas voted to approve the merger with ONEOK, and that put it in the wastebasket."

However, Southwest is not home free. On Friday, the Arizona Corporation Commission's hearing officer decided to delay hearings on the Southwest-ONEOK merger until Dec. 2, one month later than planned. The delay was requested by Commissioner Walter Mundell. It is the fourth delay ordered so far by the Arizona commission.

The delay was requested because of the sheer amount of materials received during the commission's investigation of ONEOK and its dealings during the Southwest transaction.

"Honestly, we're just trying to figure out who ONEOK is at this point," said Jerry Porter, spokesman for ACC Chairman Carl Kunasek. "We need to get a feel for whether or not ONEOK has been truthful with us.

"If ONEOK has been honest with this commission, they'll be fine. If they haven't been (forthcoming), they won't be (fine)."

Kunasek has been the most vocal critic of ONEOK on the ACC.

Phelps said Southwest supports the commission's decision, and was not concerned about the delay.

"As far as we're concerned, this is absolutely the appropriate thing to do," Phelps said. "The commission needs to look at the material carefully and come to an appropriate conclusion. We have no interest in seeing them make a hurried decision."

ONEOK originally requested a delay in the hearings in July, after federal and state authorities began probing allegations that Arizona Commissioner Jim Irvin attempted to influence Southwest's board into voting for the ONEOK offer. Hearings were supposed to begin Sept. 1, but were delayed until Oct. 21 after Kunasek and Mundell agreed that more time was needed to gather information on ONEOK's involvement with former ACC Executive Secretary Jack Rose. They were again delayed until Nov. 4 because of scheduling difficulties.

The timing of the deal's close is considered important because of the nature of the natural gas business. The majority of natural gas revenues are derived in the cold winter months, so it is in ONEOK's interest to close the deal before the onset of winter.

Although Southwest's merger has been approved by Nevada and shareholders, it cannot be consummated without regulatory approval from Arizona and California.

Porter said the investigation is now centering on three pieces of material: First, Prudential Securities' dealings with Rose; second, telephone conversations between ONEOK officials and Rose; and third, a contract Rose allegedly had with Prudential that could have paid him millions of dollars for landing business with ONEOK.

The commission has been presented with evidence introduced by Southern Union in federal court that showed Rose made repeated calls to ONEOK officials, as well as the home of Gene Dubay, the ONEOK official designated to take over the chief executive's spot at Southwest after the merger closes.

ONEOK has told Kunasek that it only learned about Rose's contract with Prudential on July 20, and it strongly denies any involvement in that contract or any intent to use Prudential to fund the Southwest acquisition. The company also denies making any payments to Rose or to collaborating with Irvin to kill Southern Union's bid to acquire Southwest.

But Kunasek is still pressing for more documentation on Rose's Prudential contract. During a recent deposition related to Southern Union's lawsuit, Porter said a Southern Union attorney attempted to show him material from the Prudential contract, at which point, a ONEOK attorney "literally blew up."

"The fact that ONEOK protested so much suggested to me there's something there," Porter said. "I want to see that."

Kunasek is also pressing for more information out of Oklahoma. Specifically, his office has asked the Oklahoma Corporation Commission to unseal a file dealing with ONEOK's awarding of a gas supply contract to a company called Dynamic Energy Resources in 1993. This company was owned by Gene and Nora Lum, Democratic Party fundraisers who later pled guilty to campaign finance violations. Gene Lum also pled guilty to tax fraud.

The contract was awarded to Dynamic after it agreed to buy out Gage Corp., a small gas supplier that was pursuing a lawsuit against ONEOK. The deal was contingent on this lawsuit being dropped.

Porter said the Arizona commission is requesting this report because it could shed light on ONEOK's dealings with Oklahoma regulators in the past. The Oklahoma commission was to decide today if the file should be unsealed.

ONEOK spokesman Don Sherry said most of the report has already been released, but certain elements were sealed because they contained information regarding other gas contracts ONEOK awarded for comparative purposes, and this information was covered by a confidentiality agreement. But Sherry said ONEOK does not oppose the files being unsealed.

"We would be delighted for him to have it, because (ONEOK) is completely exonerated in that report," Sherry said. "From our point of view, this is a non-event, and we have no objection to anything (Kunasek) has requested."

Oklahoma Commission Chairman Bob Anthony has also released a copy of his own investigation into the matter to Kunasek. A copy of this document, obtained by the Sun, contains a 1993 FBI report containing allegations that ONEOK had coordinated the buyout of Gage "to cover up improper donations by (ONEOK)." The FBI report was compiled during a corruption investigation of the Lums.

"Unsupported allegations charge the Lums are merely acting as a straw buyer for (ONEOK), providing (ONEOK) a way to eliminate the lawsuit without admitting responsibility," the FBI report states.

Sherry said ONEOK has refused to provide information for the file.

"We would have complied with any order that was by a majority of the Oklahoma commission ... we don't believe this was a legitimate cause," Sherry said. "This was a vehicle used by those interested in characterizing (the Dynamic Energy contract) as something as more than meets the eye."