* ETE strikes new deal at $40/shr, tops Williams bid by $1
* Lindemann, Herschmann cancel $100 mln payout agreement
* Deal getting pricey as bidding war heats up-analyst
* Southern Union shares up, investors expect rival bid
(Updates stock price, adds analyst quote)
By Michael Erman
NEW YORK, July 5 Pipeline operator Energy
Transfer Equity LP (ETE.N) struck a sweetened $5 billion deal
to buy Southern Union SUG.N, but the 21 percent bump may not
be enough to scare away rival bidder Williams Cos Inc (WMB.N).
The $40 per share cash and stock deal reached on Tuesday
tops Williams' unsolicited bid by about $1 per share and drops
a controversial $100 million payout to Southern Union's top two
But Southern Union's shares rose 2.9 percent to $41.53,
suggesting investors expect Southern Union will still receive a
"There is no doubt that Williams has the capacity to
continue bidding more," Carl Kirst, an analyst for BMO Capital
Markets, said, citing Williams' comments about how a deal for
Southern Union could add to its bottom line.
Southern Union owns and runs more than 20,000 miles of
pipelines in the U.S. Southeast, Midwest and Great Lakes
regions as well as Texas and New Mexico. It also owns local gas
distribution companies that serve more than half a million
end-users in Missouri and Massachusetts.
Despite weak natural gas prices NGc1, production has been
rising as energy companies pile into shale fields --
underground rock formations rich in oil and gas.
Increased production from shales such as the Marcellus in
the eastern United States has benefited companies transporting
and processing natural gas like Williams, Southern Union and
Energy Transfer. The deal would nearly double Energy Transfer's
pipeline capacity and position it for future gas demand.
Moreover, assets such as Southern Union rarely come to the
market, giving the company a scarcity value that is making it
more attractive to rivals.
The bidding war is already making Southern Union look
The master limited partnerships that compete with Southern
Union trade at roughly 11 times 2012 earnings before interest,
taxes, depreciation and amortization (EBITDA), according to an
analyst who requested anonymity because he was not authorized
to speak to the press.
The latest ETE bid values Southern Union at roughly 9.6
times 2012 EBITDA, which paired with tax costs to drop the
company's assets into MLPs means the bids are starting to get
expensive, the analyst said.
MLPs are favored by owners of cash-generating pipeline and
other energy infrastructure assets because they allow the
companies to operate while paying virtually no corporate taxes.
But there is an initial tax bill when assets are moved into
Energy Transfer also raised the break-up fee it gets paid
if Southern Union walks away to $162.5 million. The original
deal set the breakup fee at $92.5 million for the first 40
days, and $135 million thereafter.
BMO's Kirst said that Williams needs to consider whether it
will now be too expensive to top Energy Transfer.
"If Williams does decide to come out and counter, odds are
it's not going to take just a dollar," he said. "They are going
to have to put something out that once again establishes to
Southern Union's bid that this is a superior offer."
TIMELINE-The bidding race for Southern:
BREAKINGVIEWS-Pipeline saga shows open M&A market is
FACTBOX-US shale natural gas & oil M&A:
BREAKINGVIEWS-Shale gale drives M&As:
The new deal replaces a complicated $33-a-share deal ETE
reached with Southern Union last month, which would have been
payable in newly issued series B units of Energy Transfer.
Williams had topped that deal with an unsolicited $39 a
share cash bid. [ID:nN1E75M1OL]
In the latest agreement with ETE, Southern Union
shareholders can elect to swap their common shares for $40 of
cash, or 0.903 Energy Transfer common units.
Southern Union Chief Executive George Lindemann and Chief
Operating Officer Eric Herschmann also volunteered to cancel
consulting and non-compete agreements they signed as part of
the original deal with Energy Transfer that would have paid
them each $50 million over five years.
"This deal creates strategic benefits that could not be
achieved through any other industry combination," Southern
Union's Lindemann said in a statement.
Dallas-based Energy Transfer said it has secured about $3.3
billion in committed financing from Credit Suisse CSGN.VX and
received signed support from 14 percent of Southern Union
The maximum cash component of the Energy Transfer bid would
be 60 percent of the total deal value, and the unit component
can fluctuate between 40 and 50 percent.
In connection with the deal, Energy Transfer said it plans
to drop Southern Union's 50 percent stake in Citrus Corp --
owner of the Florida Gas Transmission pipeline system -- down
to its master limited partnership Energy Transfer Partners
(ETP.N) for $1.9 billion in cash after the deal closes.
The drop-down will allow Energy Transfer Equity to
deleverage its balance sheet, the company said.
Credit Suisse is acting as ETE's financial adviser, while
Evercore Partners and Goldman Sachs are advising the special
committee of Southern Union's board that is working on the
(Additional reporting by Krishna N Das in Bangalore; Editing
by Maju Samuel, Dave Zimmerman, Paritosh Bansal)