Fund manager presses for higher price for Southwest Gas shares

David Strow

Thursday, Jan. 13, 2000 | 11:09 a.m.

As Southwest Gas Corp.'s proposed $1.8 billion merger with ONEOK Inc. of Tulsa, Okla., grows increasingly doubtful, the Las Vegas company's largest shareholder is renewing his calls for a sweeter offer.

Mario Gabelli, a prominent New York investor, controls nearly 10 percent of Southwest's stock through the Gabelli Funds and GAMCO Investors, both investment funds that he oversees.

An outspoken critic of ONEOK's $30 per share offer for Southwest, Gabelli told the Las Vegas Sun on Tuesday that the potential end of Southwest's flirtation with ONEOK was an opportunity for the company's investors -- and that he believes Southwest should fetch at least $40 per share in a bidding process, nearly double its current trading value.

"The consideration that we think the shareholders should receive, based on about 15 transactions, all in the gas business, indicate and support an evaluation in excess of $40 (per share)," Gabelli said. "We could go back to the world and say, 'We're for sale, and we think it's worth well in excess of the price on the table, so bring your best offer.'

"This time, they should do it in the fish bowl of the free market system."

A $10 swing in the offer would mean an additional $30 million in cash for Gabelli's investors.

Gabelli raised this issue with Southwest Gas Chief Executive Michael Maffie last week. In a letter dated Jan. 6, Gabelli argued against extending the deal's "drop-dead" date of June 14. If the deal was not closed by that date, the deal would be cancelled unless both sides agreed to extend the timetable.

"We may now have another opportunity to sell the company at a price closer to its intrinsic value," Gabelli wrote. "We strongly urge the board of directors not to extend the drop-dead date unless we get a material improvement in the sale price."

When the deal was first announced in December 1998, the drop-dead date was more than 18 months away. But the merger has been delayed by proceedings in Arizona, where allegations of wrongdoing involving ONEOK and several Arizona regulators has led to repeated delays in the approval process.

The Arizona Corporation Commission is set to hold hearings on the merger in February. But if the ACC follows the recommendation of its staff, approval could take far longer.

In a recommendation issued last week, the staff recommended that Arizona's approval be delayed until ONEOK's litigation with Southern Union Co. of Austin, Texas, is resolved.

Southern Union offered $33.50 per share for Southwest Gas in February 1999, a bid that was rejected by the Southwest Gas board. In July, Southern Union filed a racketeering lawsuit against ONEOK and Southwest Gas in Phoenix, accusing the companies of conspiring with several Arizona officials in an attempt to derail Southern Union's bid through the regulatory process.

These accusations have led to investigations by the FBI and Arizona law enforcement officials. They have also caused the ACC to delay hearings repeatedly while the matter is being investigated.

"My guess is that if (Arizona courts) are like everywhere else in the country, you could be two or three years away from getting that resolved," said Michael Garvey, who analyzes ONEOK for CIBC World Markets. "It could easily go past (June 14)."

At this point, neither ONEOK or Southwest Gas are prepared to say if they're willing to go past that date.

"It's premature for the board to make any decision about this matter," said Southwest Gas spokesman Lew Phelps. "That's a decision that will be made at the last board meeting before the deadline, given all of the circumstances in hand at that time."

"There's been no decision made," said ONEOK spokesman Weldon Watson. "Those kinds of decisions would have to be made by the executive management of Southwest Gas and ONEOK at the appropriate time."

But Jerry Porter, chief aide to ACC Chairman Carl Kunasek, said Kunasek is committed to resolving the issue in February.

"Chairman Kunasek will absolutely not support a delay," Porter said. "We think that significantly jeopardizes the company, shareholders and customers. My own read is that it's very unlikely the commission would further extend this.

"We'll have a discussion, the commission will take a vote, and what will be will be."

Porter has expressed serious doubts about the merger being approved, and the stock market appears to agree. Southwest Gas closed Tuesday at $21.63, 27 percent below ONEOK's offer. Analysts say that price is based solely on Southwest Gas' business, rather than any potential takeover by ONEOK.

This low price doesn't deter Gabelli from sticking to his position that the stock is worth at least $10 more than what ONEOK was willing to pay, and nearly $20 more than its current value.

"The concept of value has nothing to do with the stock price," Gabelli said. "The fact that it's selling at $22 is a hair shirt. It reminds us how dumb we were to let this management do what it did.

"All I'm asking them to do is put this company back to auction again."

Garvey said Southwest Gas could get at least the price it got from ONEOK if it was put up for sale again, and could get as much as $33 per share. But he doubts it could go much higher.

"It's not worth $40 per share," Garvey said. "You could make any argument on price you want, but if you look at the deals that have occurred over the last two years, the price ONEOK paid was in line with similar transactions. They didn't steal these assets.

"If for some reason ONEOK walks away, you'll see someone else offer $30 to $33. But I don't think you'll see it get any higher."

Even if the deal is approved, ONEOK has already made one change in its plans for Southwest -- Gene Dubay, head of ONEOK subsidiary Kansas Gas Service, will not be the chief executive overseeing Southwest Gas from Las Vegas, as was previously announced.

If the deal closes, the company will be overseen directly by ONEOK President and Chief Operating Officer David Kyle, who will remain in Tulsa.

Watson, however, said ONEOK remained committed to the long-term goal of having Southwest Gas managed in Las Vegas.

"We need a person who is on point ... and that's been given to Mr. Kyle right now," Watson said. "That doesn't mean he'll continue there forever. Those are the kind of decisions that can be made later.

"One thing we've always believed, as a company, is to have management on site."

Dubay was caught up in the investigation swirling around Southwest Gas and Jack Rose, former executive secretary of the ACC. After leaving the ACC, Rose received a consulting position with Prudential Securities, and attempted to win a contract for Prudential in financing ONEOK's buyout of Southwest Gas. Southern Union alleges Rose, motivated by potential commissions from such a deal, assisted ONEOK as it tried to get its application approved by regulators.

Internal memos from Prudential indicate that Prudential executives were told by Rose that he was negotiating through Dubay. The memos also indicate Prudential officials believed Dubay wanted to keep these negotiations in his "exclusive purview." ONEOK and Prudential never signed a financing contract, though Prudential claims it was offered a financing deal by ONEOK in July.

"There are many unfair and false allegations involving (Dubay)," Watson said. "This is no reflection on the part of the company on Gene's efforts, or on some of the false allegations made about him.

"There are plenty of other responsibilities for him in other areas of the company. We don't want him to be the focal point or the hang-up in this transaction. He should not be the issue, and this leaves no doubt."

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