The shale gas boom echoes in Energy Transfer Equity’s $4.2 billion acquisition of Houston-based Southern Union Co.
The deal announced Thursday, which will create the largest natural gas pipeline company in the U.S. with more than 44,000 miles of pipe and 30.7 billion cubic feet per day of capacity, was fueled in part by the need to move natural gas liquids out of the prolific shale regions.
Pipelines are growing congested as areas such as the Permian Basin and Eagle Ford shale in Texas produce natural gas liquids in quantities far above what the system can handle, Energy Transfer Chairman Kelcy Warren said during a conference call with investors.
“I personally see a train wreck if someone doesn’t build takeaway capacity in that region very soon,” Warren said.
The deal gives Dallas-based Energy Transfer access to Southern Union’s strong, steady cash flow, and will help it on some $1.7 billion in expansion projects.
Energy Transfer has some of the best access to the growing shale regions around the country.
Acquiring Southern Union gives it access to markets in Florida, where natural gas generates half the electricity, and to more than a half million natural gas customers through Southern Union’s Missouri and New England distribution businesses.
When the deal is closed, the combined businesses will be worth about $40 billion. Houston-based El Paso Corp., now considered the largest gas pipeline company in the country, has 42,000 miles of pipelines and market capitalization of about $14.78 billion.
Under terms of the deal Southern Union shareholders will exchange their shares of common stock for newly issuedSeries B Units of Energy Transfer Equity worth $33 per unit, or about $4.2 billion. That’s a 17 percent premium to Southern Union’s Wednesday closing price.
Energy Transfer Equity also will take on $3.7 billion in Southern Union debt.
Units of Energy Transfer Equity closed up $3.49 at $45.96 and Southern Union shares rose $4.95 to $33.21 in trading Thursday on the New York Stock Exchange.
For now, Southern Union will be a wholly owned subsidiary of Energy Transfer Equity, but its assets may be transferred over time to ETE’s two master limited partnerships — Energy Transfer Partners, which owns and operates about 17,500 miles of gathering and transport pipelines, and Regency Energy Partners, which owns and operates natural gas processing facilities.
It’s not clear what will happen to the 600 employees in Southern Union’s Houston offices or any of its other workers. A spokeswoman for ETE said the companies have made no decisions on the head count but that they will develop an integration plan.
ETE said officials have identified about $100 million in cost savings between the two companies, including $25 million in “corporate overhead” and $75 million in field operation consolidations. The company also said it believes it could save another $25 million in one-time costs by doing things such as sharing existing pipeline rights-of-way for new or expanding projects.
Warren said the companies have discussed the transaction off and on over the years.
The deal is the largest purchase of a pipeline company this year, according to Bloomberg, and helped push the U.S. mergers and acquisitions market beyond the $500??billion mark for the year, according to data compiled by Dealogic.
It’s also unusual in that ETE, a master limited partnership that is publicly traded but enjoys lower taxes because of its structure, is purchasing a public corporation.
Southern Union recently announced plans to partner with British gas giant BG Group to apply for a federal license to export liquefied natural gas from its Lake Charles, La., LNG import terminal.
The glut of natural gas in the U.S. because of shale production has driven down prices, making such exports competitive on the global market.
Warren said the possible LNG exports were an attractive part of the Southern Union deal.
“We liked the project and did give it some value,” he said.