RGNC Regency Energy Partners LP - Common Units Representing Limited Partner Interests (MM)

The race for Southern Union Company (SUG) has just become hotter with Williams Companies Inc. (WMB) reiterating its keenness in acquiring the company for $44.00 per share in cash, cumulating to a total of $5.5 billion in cash.

The deal was first broached on July 14, 2011. Williams conveyed its proposal via a letter to the Special Committee of Southern Union's Board of Directors. Williams is pushing ahead for the deal since on July 29, 2011, Energy Transfer Equity L.P. (ETE) and Southern Union had announced the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for the consummation of the proposed merger.

Southern Union had earlier agreed to be acquired by Energy Transfer. However, after Williams entered the fray, the deal was renegotiated on July 19, 2011. Per the new agreement Southern Union shareholders can elect to exchange their common shares for a mix of cash and Energy Transfer units. The cash component was proposed at 60% and the rest in the form of Energy Transfer units.

Williams opines its all-cash proposal of $44.00 per share represents a premium of 4% over the implied value of Energy Transfer’s offer of $42.32 per share. Williams calculation is based on the closing price of Energy Transfer units on August 16, 2011. Also last week Energy Transfer units have traded as low as $33.21 indicating significant loss of value for the deal.

Southern Union Company owns one of the largest interstate pipeline networks in the U.S. and one of the largest LNG import terminals in North America. Management’s focus on the regulated asset base will provide the company with low-risk growth. The company is also well positioned in the Permian Basin to focus on further natural gas midstream expansion programs.

Williams plans to utilize Southern Union’s network of pipelines to connect customers in Florida to new sources of natural gas in the Permian Basin and Granite Wash field in Texas and Oklahoma. Should the deal fructify, Williams will gain a stronger foothold in the North American region and get access to the rich shale basins and end-use markets.

The icing on the cake for Energy Transfer would have been the attractive assets of Southern Union. These would have been owned and operated by its two master limited partnership (MLP) subsidiaries, Energy Transfer Partners, L.P. (ETP) and Regency Energy Partners LP (RGNC). Whosoever clinches the deal will become one of the largest natural gas infrastructure players in the U.S. The recent push to acquire Southern Union has led us to retain a short-term Zacks #2 Rank (Buy) on the stock.

However, long-term valuation continues to be restricted by the company’s overt dependence on outside funds to sustain its expansion programs, as well as seasonality in its pipeline business and re-contracting uncertainty for its proceed contracts. Thus, in the absence of further positive triggers, we maintain our long-term Neutral recommendation on the stock.

 
ENERGY TRAN EQT (ETE): Free Stock Analysis Report
 
ENERGY TRAN PTR (ETP): Free Stock Analysis Report
 
SOUTHN UNION CO (SUG): Free Stock Analysis Report
 
WILLIAMS COS (WMB): Free Stock Analysis Report
 
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