Shareholders Ratify SUG-ETE Merger - Analyst Blog

Southern Union Company (SUG) has received approval from majority of its shareholders for its proposed merger with Energy Transfer Equity, L.P. (ETE). Approximately 80% of the Southern Union’s shareholders voted at a special meeting, out of which 98% voted in favor of the merger.

In June 2011, Southern Union had entered into a definite agreement with Energy Transfer Equity, L.P. as per the terms of which the latter had agreed to buy Southern Union for $7.9 billion, including $3.7 billion of existing debt. In July, the agreement was revised. Per the restated agreement, Energy Transfer Equity will acquire Southern Union for $9.4 billion, including $5.7 billion in cash and Energy Transfer Equity common units.

Post shareholders’ approval, Southern Union announced that its shareholders can choose to exchange their common shares for $44.25 of cash per share or 1.000x Energy Transfer Equity common unit. The maximum cash component permissible is 60% of the aggregate merger consideration amount.

On the other hand, no more than 50% can be paid in ETE common units. Elections in excess of either the cash or common unit limits will be done on pro-rata basis.

The merger is expected to close in first quarter of 2012, subject to receipt of all required regulatory approvals and satisfaction of other closing conditions.

Southern Union currently owns one of the largest interstate pipeline networks in the U.S. and one of the largest liquefied natural gas (“LNG”) import terminals in North America. It is well positioned in the Permian Basin to focus on further natural gas midstream expansion programs.

However, we are concerned about the pending approvals for its merger deal, dependency on outside funds for expansion programs and seasonality in its pipeline business. Thus, in the absence of further positive triggers, the company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

Based in Houston, Southern Union Company is one of the nation’s leading diversified natural gas companies, engaged primarily in the transportation, storage, gathering, processing and distribution of natural gas.

The company owns and operates one of the nation’s largest natural gas pipeline systems with more than 20,000 miles of gathering and transportation pipelines. It is also one of North America’s largest liquefied natural gas import terminals and serves more than half a million natural gas end-users in Missouri and Massachusetts.

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