Small shareholders rip Southwest Gas merger

Losses reported

Southwest Gas Corp. on Tuesday reported a second quarter loss of $3.6 million or 12 cents per share compared to a loss in the year-ago period of $2.5 million or 9 cents per share. Losses are normal in the second and third quarters due to the seasonal nature of the business.

Despite the wider loss, Chief Executive Michael Maffie said the company's operating results exceeded expectations.

Customer growth of 5 percent helped the company increase operating margin $3.6 million or 4 percent vs. the year-ago quarter.

For the year ended June 30, net income was $38.8 million, or $1.29 per basic share vs. $41.1 million or $1.50 during the preceding year.

Southwest Gas Corp. of Las Vegas received shareholder approval of its proposed $1.8 billion acquisition by ONEOK Inc. Tuesday, despite the determined opposition of a vocal minority.

About 22 million shares, or 72 percent of the company's outstanding shares, were voted in favor of ONEOK's $30 per share cash offer. Company officials said 91 percent of the shares were voted at the meeting.

The vote was the largest hurdle that Southwest faced in closing the deal. Now, Southwest needs only to win regulatory approval from California and Arizona to close the acquisition. ONEOK shareholders will not vote on the matter. The acquisition is expected to close in the fourth quarter.

But the standing-room-only crowd of more than 300 proved to be a hostile audience for Southwest officials. More than 20 shareholders ripped Southwest's board and executives during the 30-minute comment period, and not one shareholder voiced support for the proposal.

Some demanded to know why Southern Union Co.'s $33.50 bid was rejected, while others told Southwest's board that they felt they were being kicked out of their investments against their will by ONEOK's cash-only proposal.

"You people make me sick," one California investor told Southwest's board, his voice starting to shake with rage. "This is not a merger ... if it was a merger, we'd be part of that new company.

"I couldn't care less what happens to Southwest Gas."

Southwest Chairman Thomas Hartley and Chief Executive Michael Maffie stuck to their original reasons for accepting the takeover -- that Southwest needed a strong parent company with the financial resources to keep up with the demands of its rapidly growing service territory.

But few in attendance Tuesday were buying it. Many were senior citizens who had invested in Southwest stock for a decade or more as a steady investment, and were infuriated at Southwest for agreeing to a proposal that forced them to cash out their shares and pay capital gains taxes.

Until Tuesday, the most prominent shareholder dissent had come from New York investor Mario Gabelli. With 10 percent control, Gabelli is Southwest's largest shareholder, and he vowed to vote against the proposal, stating that he preferred a "fully-financed deal that more than made up for any bureaucratic delays." No Gabelli representative spoke at Tuesday's meeting.

Those that did speak echoed the frustration Gabelli first voiced in February.

"I feel like I am the one that built Southwest Gas to where it is today," one Las Vegas woman, who said she'd been buying shares since the 1950s, told Hartley. "It's not right to treat us this way.

"Look at the grey-haired people here. You're dumping on us ... it's just not right. It's not right for Tulsa (ONEOK's headquarters) to come in here and say, 'Get out of here, you old people.' "

"You forget how we stuck with you ... when you couldn't pay dividends," another woman said. "Now you turn around and say, 'Out.' "

When pressed by shareholders for the reason the deal was all cash, Hartley responded that "ONEOK has a lot of cash." He noted that Southwest had been shopped for several years, and that only ONEOK and Southern Union had been willing to put up what they considered a fair price for the utility.

Maffie added that ONEOK didn't offer Southwest the option of taking either cash or stock.

"That was the offer the board had to evaluate," Maffie said.

Maffie found himself as the target of some of the most angry criticism, as shareholders vented their fury at his "parachute" package. Maffie will collect $16.6 million over the next five years, including a $3 million severance payment and a five-year, $3 million consulting contract with ONEOK. One fact that drew particular ire was ONEOK's agreement to cover any taxes Maffie would have to pay on the parachute.

"I'd be happy to sell if I was getting the deal the CEO and the board of directors are going to get," one woman said. "I not only object ... I'm furious."

At one point, Maffie's attempts to talk to the audience were nearly drowned out by catcalls and heckling from the audience. Maffie kept his composure, but was obviously irked.

"Please be quiet ... I'm speaking," Maffie said. "I think I deserve a little more respect."

Maffie declined to speak with reporters after the meeting.

Shareholder John Smith demanded to know why he wasn't getting the extra $3.50 per share offered by Southern Union, and noted that after capital gains, he'd receive "$26 and change" per share.

"You've done a great job for employees, a great job for users and a lousy job for the shareholders," Smith said. "Without the shareholders, you wouldn't have a company."

Hartley responded to the Southern Union question by saying that the board "had serious concerns whether the (Southern Union) offer could ever be successful."

Southern Union had been barred from talking to Southwest's shareholders by a temporary restraining order issued by federal Judge Erik Holmes of Tulsa, Okla., in May. Today, Holmes will consider a motion by ONEOK to find Southern Union in contempt for filing a racketeering and fraud lawsuit against ONEOK, Southwest and two Arizona regulators in Phoenix federal court. If the ONEOK motion is successful, it would prohibit Southern Union from acting on the lawsuit until after Southwest is absorbed by ONEOK, essentially ending any hopes of blocking the deal.

Perhaps the most vocal shareholder at Tuesday's meeting was Las Vegas shareholder Edward Taylor, who passed out an anti-ONEOK letter before the meeting convened.

"The only ones who stand to gain are the board of directors and the IRS," Taylor's letter said. "The rich get rich, while the common shareholder will pay up to 20 percent capital gains tax on this one-sided transaction and then get rudely dumped from a sound 18-year investment program.

"If ONEOK is such a great company, why are they dissolving a great investment program?"

Taylor called the ONEOK proposal "one unacceptable option" and told Hartley that shareholders could still turn to a class-action lawsuit if the acquisition was approved.

"Thanks a lot, Southwest," Taylor said loudly as the meeting adjourned. He then crumpled up a ballot and tossed it over his shoulder as he left the room.

"This is what I think of you."

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