Tags: Southern | arbitration | play | SUG

Southern Union Creates Arbitration Play

By    |   Friday, 21 Oct 2011 10:52 AM

The Southern Union Company (SUG) is a midstream natural gas transport and distribution company. At this point, the company's business does not really matter for investors or traders, as the shares are in play due to a pending merger offer.

In June, Southern Union management agreed to a merger with Energy Transfer Equity (ETE). The deal involved Energy Transfer Equity issuing a new class B class of shares in exchange one-for-one for shares of Southern Union.

The ETE B shares were valued at about $33 at the time of the announcement and included a guaranteed 8 percent dividend rate. Soon after, the Williams Companies (WMN) made an unsolicited all-cash $44 per share offer for Southern Union. The merger offer with Energy Transfer Equity was renegotiated and currently stands at $45 per share, or one share of ETE for each share of SUG.

According to the Southern Union second quarter earnings release, the merger is expected to be completed in the first quarter of 2012.

With Southern Union currently trading around $40 per share, it seems like a quick profit to pick up shares and exchange them for $45 cash in a few months. However, the details of the merger agreement limit the amount of cash going into the deal at 60 percent of the merger value.

Energy Transfer Equity is currently trading for about $36 per share. So the current merger deal is for either $45 cash or an ETE share worth $36. It is easy to see why SUG is trading for $40.

Willing bidder

If not enough SUG shareholders agree to exchange for shares — and who would at a 10 percent haircut — the agreement allows for elections to be prorated in cash and shares of ETE. This twist in the merger means a couple of outcomes are possible: If the value of Energy Transfer Equity moves up to the $45 per share range, Southern Union shareholders would probably go along and tender their shares.

If the ETE share price stays down, however, shareholders may not want to accept a deal worth $40 when there is another willing bidder who has expressed an offer to pay $44 per share.

There is a distinct possibility the current deal may get sweetened before the merger can actually go through, providing a nice short term profit for buyers at the current Southern Union share price.

The company reports next on Nov. 3.

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The Southern Union Company (SUG) is a midstream natural gas transport and distribution company. At this point, the company's business does not really matter for investors or traders, as the shares are in play due to a pending merger offer. In June, Southern Union...
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2011-52-21
Friday, 21 Oct 2011 10:52 AM
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