NEW YORK 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 executives.
But Southern Union's shares rose 2.9 percent to $41.53, suggesting investors expect Southern Union will still receive a higher bid.
"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, 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 pricey.
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 that structure.
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."
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.
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 shareholders.
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 deal.