ONEOK poised to win merger fight for utility

Shareholders of Las Vegas-based Southwest Gas Corp. won't formally vote on its $1.8 billion merger with ONEOK Inc. until Tuesday. But that vote may now be a mere formality.

More than half of Southwest's 30.4 million shares have been cast in favor of the merger by proxy, a Southwest Gas spokesman said. That gives the utility the majority it needs to close the deal unless the proxies are withdrawn at the last minute.

ONEOK is offering $30 per share in cash for Southwest Gas. Southern Union Co. has topped that, with a $33.50 bid, but has been barred from making any attempt to influence the vote by a federal judge's order.

The local company's apparent victory came despite protests of New York investor Mario Gabelli, its largest shareholder. Gabelli told Southwest Gas Chief Executive Michael Maffie in a letter that he "prefer(red) a fully financed offer that more than compensates for any bureaucratic delays," and expressed his intention to vote against the merger. Gabelli later published the letter in his ownership documents filed with the Securities and Exchange Commission.

But late last month, Institutional Shareholder Services of Rockville, Md., one of the nation's largest advisory and research agents for institutional investors, advised its clients to vote for the merger. ISS acknowledged that the Southern Union offer was higher, but said shareholders "need certainty," and claimed the choice was between "the ONEOK deal or no deal at all."

Institutional shareholders own about 50 percent of Southwest Gas stock.

Southern Union has been battling ONEOK for Southwest Gas ever since the utility spurned the Southern Union bid in February.

In December Southwest Gas and ONEOK announced a friendly takeover deal valued at $28.50 a share. Southwest Gas had been talking with other companies about a takeover since 1996, believing that it did not have the capital resources to keep up with rapid growth in its territory, or to react to the pressures of a deregulated energy market.

In February, Southern Union broadsided ONEOK, publicly announcing a $32 per share offer for Southwest Gas, which rejected that offer. But it was able to use it as leverage to force ONEOK's bid up to $30. Southern Union promptly responded with its $33.50 offer. But Southern Union's ability to sway shareholders was permanently crippled when federal Judge Erik Holmes of Tulsa, Okla., hit Southern Union with an injunction in May that barred it from trying to influence the shareholder vote.

But with victory apparent in the Southwest Gas vote, and a critical court hearing coming up Wednesday, Southern Union could be out of the running altogether by week's end.

Holmes will hold hearings on a ONEOK motion to find Southern Union in contempt for violating his injunction. ONEOK is arguing that Southern Union's federal racketeering and fraud lawsuit, filed against Southwest and ONEOK in Phoenix, is little more than an attempt to generate negative publicity about ONEOK and circumvent Holmes' order.

If ONEOK wins, it would effectively freeze the suit until after the merger is complete, ONEOK's spokesman Weldon Watson said. That would end its effectiveness as a tool for blocking the merger.

"He would be saying, in essence, that their action in (Arizona) court was not appropriate," he said.

Last Thursday the judge overseeing the Arizona case refused to block Arizona Corporation Commissioner Jim Irvin, a defendant in the suit, from voting on the Southwest Gas merger. On the same day a California judge refused to stop the Southwest shareholder vote while a lawsuit in that state moves forward.

But if the battle ends and ONEOK is victorious, Southwest Gas will carry one prominent reminder of Southern Union -- Eugene Dubay, the man designated by ONEOK to head the utility after it's absorbed into the Oklahoma company.

Dubay, ONEOK's vice president of corporate development, has run Kansas Gas Service since ONEOK acquired it from Western Resources Inc. in 1997. Dubay was also the point man in negotiating the deal for ONEOK.

Dubay served in a similar role in sewing up the Southwest deal, Watson said, and Dubay will take over in Las Vegas once Maffie departs.

"That's the plan right now," Watson said. "He's going to be the one in charge."

But before he became ONEOK's dealmaker in 1996, Dubay worked for Southern Union. He was executive vice president and chief operating officer of Missouri Gas Energy, a company bought out by Southern Union in 1994. One year later Dubay was among executives to depart MGE in the wake of Southern Union's takeover.

MGE has had an unusual amount of influence on the fight to control Southwest Gas. A spate of billing errors in 1996 and 1997 turned Missouri regulators sour on the company. Southern Union's Missouri troubles, and its contentious relationship with that state's regulators, helped turn the Southwest Gas board against the merger, according to the company's proxies.

Dubay departed MGE in 1995, two years before the company ran afoul of Missouri regulators. In 1997, the Kansas City Star suggested Dubay and other colleagues were purged by Southern Union for opposing aggressive cost-cutting. Southern Union has claimed the 1997 incident was the result of problems in place since before 1994.

"The procedures we had in place, and the software system we had in place, came from the previous owner," Southern Union Treasurer George Yankowski told the Sun in June.

Yankowski declined to talk about Dubay's involvement with MGE, citing the federal injunction placed against Southern Union.

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