Southwest releases key letter in failed merger

David Strow

Thursday, Jan. 27, 2000 | 11:08 a.m.

Las Vegas-based Southwest Gas Corp. has released its chief executive's final letter to would-be merger partner ONEOK Inc. -- a letter that apparently led to the death of the deal.

The letter, sent by Southwest Chief Executive Michael Maffie Jan. 18, was released in a Securities and Exchange Commission filing today. ONEOK had refused to release the Maffie letter or its response, calling the letters confidential.

Three days after Maffie sent this letter, ONEOK canceled its $1.8 billion merger with Southwest, then asked an Oklahoma federal judge to give the termination its blessing. Southwest retaliated Monday with a lawsuit in Arizona federal court, accusing ONEOK of fraud and breach of contract.

Maffie's letter angrily accuses ONEOK of breaching its merger agreement with Southwest, citing testimony presented by the Arizona Corporation Commission staff earlier in January. Just days before the letter, the ACC staff had recommended against immediate approval of the merger.

Maffie points to several factors, including evidence that ONEOK had assisted Arizona Corporation Commissioner Jim Irvin in drafting a controversial letter to Southwest's board. Irvin had unsuccessfully attempted to get Nevada and California regulators to sign off on the letter.

Maffie also pointed to evidence that ONEOK had a business relationship with Jack Rose, former executive secretary of the ACC. Rose signed a consulting agreement with Prudential Securities after leaving the ACC, and is accused of lobbying for the ONEOK offer as part of his effort to win a financing deal for Prudential in the Southwest acquisition.

"These assertions by (the staff), (its) recommendation to the ACC, and the stated reasons therefore indicate ONEOK has breached the agreement (with Southwest) because of its failure to use all commercially reasonable efforts to obtain the required regulatory approval from the ACC ...," Maffie wrote. "We hereby demand that you cure these breaches in accordance with the terms and conditions of the agreement."

Maffie did not specify what compensation he wanted from ONEOK. The merger agreement does call for a $30 million break-up fee, though ONEOK has said it will not pay that fee.

Maffie's letter led to an icy reply by ONEOK Chief Executive Larry Brummett on Jan. 21.

"As you know, the initial termination date under the merger agreement was Dec. 14, 1999," Brummett wrote. "We have not entered into any agreement with you or otherwise acknowledged that conditions for an extension of this merger date ... were met.

"Accordingly, this letter constitutes written notice to you that ONEOK has elected to terminate the merger agreement and abandon the mergers contemplated thereby."

Brummett said the conditions that would allow for an extension had not been met.

"Among these failed conditions was and is the pendency of Southern Union's failed litigation against Southwest and ONEOK seeking billions of dollars in damages," Brummett wrote.

Southern Union Co. of Austin, Texas, sued both Southwest and ONEOK in July, accusing the companies of racketeering. Southern Union had offered $3.50 per share more for Southwest than ONEOK, but was rejected by Southwest's board. Southern Union later accused the companies of manipulating the regulatory process in an attempt to scuttle its offer.

ONEOK's press release of Jan. 21 referred to Southern Union's claim for damages as grounds for the termination, saying it presented "financial risk" that ONEOK did not want to assume.