Evidence suggests lies by Southwest merger partner

David Strow

Thursday, Oct. 14, 1999 | 12:21 p.m.

Merger history

ONEOK and Southwest agree to merge. ONEOK will pay $28.50 per share cash for Southwest, or $1.73 billion.

Southern Union makes an unsolicited offer to buy Southwest for $32 per share, or $1.85 billion. Southwest's board enters into preliminary talks with Southern Union.

After two months of meetings and due diligence, ONEOK agrees to increase its offer to $30 per share, or $1.8 billion. Southwest's board votes unanimously to accept the ONEOK offer and reject Southern Union. Southwest argues Southern Union would have trouble getting its application through the regulatory process, and calls ONEOK a financially stronger company.

Southern Union increases its bid to $33.50, or $1.88 billion. Southwest sticks with ONEOK's $30 per share offer.

Southern Union tells the Sun it has dropped its offer for Southwest, but will pursue litigation over the merger.

An Arizona official says Southwest Gas Corp.'s planned merger with ONEOK Inc. is in jeopardy because of new evidence suggesting ONEOK lied to the government about a former regulator's involvement in the deal.

The evidence was presented in court documents filed Monday by Southern Union Co. of Austin, Texas, in federal court in Phoenix. According to these documents, Prudential Securities Inc. has testified it was offered a financing deal by ONEOK's chief financial officer on July 13. This deal, Southern Union claims the documents state, was brokered by Jack Rose, the former executive secretary of the Arizona Corporation Commission.

That would contradict statements made by ONEOK to the ACC in the past, in which the Tulsa, Okla., natural gas company denied negotiations with Rose or Prudential in connection with the deal to buy Las Vegas-based Southwest.

"Provided the Prudential disclosure is what it appears to be, in my opinion, this deal is dead," said Jerry Porter, aide to Arizona Corporation Commission Chairman Carl Kunasek. "It certainly appears to be a coordinated and potentially criminal effort to defeat the Southern Union offer."

Porter said Kunasek would not speak with reporters on the disclosure because public comments could be used as grounds to disqualify himself from voting on the ONEOK-Southwest application.

"If (Porter) indeed said that, it is very regrettable," said Weldon Watson, spokesman for ONEOK. "What we've got here is a judgment before learning all the facts. It further demonstrates the extent to which this process before the Arizona Corporation Commission has been poisoned by Southern Union's unfounded allegations.

"These kind of allegations are really very dangerous in a situation like this."

Porter said he had not seen the Prudential documents, but said he would demand that Southern Union produce them to the ACC for its investigation.

Arizona hearings on the Southwest-ONEOK merger were delayed until Dec. 2 recently to allow further gathering of evidence. The three-member ACC will have to approve the application before Southwest can proceed with its merger with ONEOK.

Southern Union has accused Rose, Southwest, ONEOK and Arizona Commissioner Jim Irvin of conspiring to kill the Southern Union offer through the regulatory process. Its racketeering lawsuit in Phoenix is demanding at least $750 million in damages.

"Neither ONEOK nor any representative of OENOK has had conversations with Mr. Rose or Prudential about Prudential's becoming involved in the ONEOK-Southwest transaction," ONEOK CEO Larry Brummett wrote in an Aug. 20 letter to Kunasek. "Neither ONEOK nor any representative of ONEOK has had conversations with Mr. Rose about his contract with Prudential."

Five days later, a ONEOK attorney expanded on this story, saying that meetings had occurred, but denied any intent to go with Prudential, saying that ONEOK intended to keep its long-standing financial relationship with PaineWebber.

"ONEOK wishes to stress one central fact: it did not know about the existence of Mr. Rose's contract with Prudential until approximately July 20, 1999, and did not learn the terms of that contract until July 28, 1999," ONEOK attorney Michael Grant wrote to Kunasek Aug. 25.

Grant said ONEOK had met with Prudential to discuss potential business deals, and that Rose attended two of these meetings. "What is not true is that ONEOK did any business with Prudential because of anything Mr. Rose did in connection with the ONEOK/Southwest transaction," Grant wrote.

Watson reaffirmed ONEOK's side of the story Wednesday.

"PaineWebber has been our investment banker for 30 years," Watson said. "There was never any intent to bring Prudential into the Southwest deal.'

However, Southern Union says Prudential documents it received under subpoena appear to contradict this. Citing Prudential information, Southern Union paints a picture of long negotiations between Prudential and ONEOK, brokered by Rose.

In fact, Southern Union says these documents state that ONEOK's chief financial officer, James Kneale, offered Prudential on July 13 a co-managing role in a financing package connected to the Southwest acquisition -- a deal negotiated by Rose. A Prudential e-mail, quoted in the lawsuit, indicates that the transaction would be a $350 million financing deal.

These Prudential documents were continually referenced in Southern Union's lawsuit, but were not provided with it. Southern Union said it was unable to release the documents to the public Wednesday because of a confidentiality order from the Arizona federal court.

Watson called the events described in the lawsuit "hearsay and innuendo," painting a very one-sided version of events. He noted that many allegations in Southern Union's first lawsuit had been removed from the amended complaint.

"Other information needs to be provided in that scenario ... everyone involved in this needs to be talked to," Watson said, declining to discuss specifics.

According to Southern Union's lawsuit, Prudential documents show it first became involved with Rose on Dec. 21, 1998, when Rose faxed J. David Dubin, Prudential's director of corporate finance, a letter that stated that Southwest had announced a planned merger.

"Given my relationship with (Southwest) and my ability to advise them on important regulatory issues related to the merger, I believe I am well positioned to get some of the underwriting business," Rose's letter to Dubin stated, according to Southern Union. Rose resigned from the ACC on Dec. 31, 1998.

In March, Rose entered into an agreement with Prudential that would give Rose up to 35 percent of any fee paid by ONEOK to Prudential, the lawsuit claims. The agreement called for Rose to receive a retainer fee of $25,000. Rose would also receive all of the first $600,000 in retainer fees paid by ONEOK to Prudential, two-thirds of the first $3 million in merger and acquisition fees, and 80 percent of the fees over $3 million, according to Prudential documents cited by Southern Union.

From Feb. 23 to June 15, telephone records cited in the lawsuit show Rose placed 83 telephone calls to ONEOK officials. The majority of these calls were to Gene Dubay, president of ONEOK subsidiary Kansas Gas Service -- and the man ONEOK has designated as the future CEO of Southwest.

Prudential's documents state that on April 12 and May 8, Prudential met with ONEOK officials and Rose to discuss a financing deal connected to the Southwest offer, Southern Union claims. A Dubin e-mail dated May 17, referenced in the Southern Union lawsuit, stated that Rose had contacted Dubay several times, and reported that ONEOK was in a hurry to line up financing. According to Dubin, Rose said Dubay was ready to award Prudential several financing contracts, but demanded that Prudential commit "substantially all of Jack Rose's time to the effort to complete the SWX transaction." A separate e-mail, sent from Dubin to Rose one week later, referred to Rose's "negotiations with Dubay and Kneale" on behalf of Prudential, according to the lawsuit.

On July 13 -- the day Prudential was allegedly contacted to participate in the underwriting agreement -- ONEOK filed a registration form with the Securities and Exchange Commission for a $300 million debt offering related to the Southwest acquisition. The form stated that PaineWebber Inc. was the underwriter, making no mention of Prudential.

On April 15, ONEOK filed a separate registration statement for a $500 million placement. This document made no mention of any underwriter.

Southern Union's lawsuit also raised new allegations regarding Irvin and Rose's efforts to sway Nevada officials. Southern Union claims it now has a deposition from Nevada Public Utilities Commission member Judy Sheldrew saying both Irvin and Rose tried to win her support for ONEOK in a March 24 meeting.

At this time, Rose was introduced by Irvin as a consultant for the ACC to Sheldrew, the lawsuit said, though Irvin said he was no longer employed by the commission. According to her deposition, Rose told Sheldrew that he'd investigated both ONEOK and Southern Union as potential merger partners, and concluded that ONEOK was "by far the superior merger candidate."

Irvin and Rose then presented Sheldrew with a letter they said would help point Southwest's board to vote for the ONEOK proposal, the lawsuit says, referencing Sheldrew's deposition. Sheldrew said she was told by Irvin that the letter could not directly tell the Southwest board to vote for ONEOK, because that would raise the appearance of impropriety, according to Southern Union's lawsuit. Sheldrew testified that both were "anxious" for her to sign this letter.

Sheldrew responded that she found the letter inappropriate, and refused to sign it after consulting with PUCN counsel, according to the lawsuit.

"I was subpoenaed to give a deposition pursuant to the requirements of that subpoena," Sheldrew told the Sun. "I did give a deposition."

She declined further comment.

One day later, Irvin and Rose met with Gov. Kenny Guinn, the former chairman of Southwest, according to an affidavit provided by Guinn's chief of staff, Pete Ernaut. Ernaut testified that Rose was presented at this meeting as a representative of ONEOK, though his affidavit states that no lobbying occurred at this meeting.

Jim Fisher, aide to former Arizona Commissioner Tony West, has testified that he and West were provided a copy of the draft letter shown to Sheldrew by Michael Maffie, Southwest's CEO. Maffie said he received this letter from Guinn, according to Fisher's testimony.

Guinn has denied being provided or sending a letter to Southwest. Irvin, in a July 20 statement, branded Fisher a political enemy, and called his testimony an attempt to damage him politically.

Southern Union said it uncovered evidence that ONEOK's corporate jet flew from Kansas City and Tulsa to Phoenix, then to Las Vegas and Carson City, from March 22 to March 24 -- the dates Irvin and Rose were meeting with Nevada officials.

Southern Union also raised new charges that ONEOK and Southwest officials convinced the Arizona Residential Utility Consumer Office -- a state-run consumer advocacy office -- to help convince the Southwest board to vote against a Southern Union merger. This claim was backed up by an affidavit filed by Greg Patterson, former director of RUCO.

Patterson testified that he first met with Maffie, Dubay and Southwest executive Edward Zub on Feb. 12 to discuss Southwest's merger with ONEOK. At this meeting, Patterson testified, he was told for the first time that Southern Union was making a hostile bid for Southwest.

"Immediately after the introductions were made, Zub, Maffie and Dubay began speaking positively of a ONEOK merger and began providing only negative information about Southern Union," Patterson's affidavit states.

Patterson said he was then told by Zub that Southern Union's debt-to-equity ratio would be 90-10 -- a charge Southern Union says was false. Zub then said Southern Union planned to fire Southwest's local management if it acquired the company, and sell the company off piecemeal, Patterson testified. These statements convinced Patterson to oppose Southern Union.

In March, Patterson said he was asked by Zub to make a presentation to the Southwest board stating that Southern Union had little chance of winning regulatory approval in Arizona. On April 6, Patterson expressed these concerns to Southwest's board saying that he thought Southern Union's debt ratio was too high. He also raised concerns about the quality of service that would be provided by Southern Union.

Soon after this meeting, Southwest's board voted to accept the ONEOK offer and reject Southern Union's bid.

"At no time during my dealings with Southwest representatives did I feel that it was Southwest management's intent to objectively evaluate Southern Union and ONEOK," Patterson's affidavit said. "I was left with the impression that Southwest management already had decided that they wanted to merge with ONEOK over Southern Union.

"In my opinion, the purpose of requesting my presentation to the Board was to assist Southwest management in convincing the Board to approve the ONEOK merger over a Southern Union merger."