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Tickers in this Article: SUG, WMB, ETE, KMI, OKE, ETP, WPZ
The world of pipelines, gas gathering and midstream assets is usually a pretty sleepy place that offers a lot more in terms of income than in headlines and excitement. With at least two bidders now fighting for Southern Union (NYSE:SUG), though, this quiet patch of the income world has gotten a lot more interesting. (To learn more about he oil and gas industry, check out Oil And Gas Industry Primer.)

TUTORIAL: The Industry Handbook: The Oil Services Industry

Williams Companies Brings the Cash
While Southern Union and Energy Transfer Equity (NYSE:ETE) had previously come together on a somewhat convoluted merger agreement, at $33 a share (for Southern Union), Williams Companies (NYSE:WMB) has shaken things up with an all-cash bid of its own that values Southern Union at $39 per share. Now let the squabbling via press release begin!

When Energy Transfer Equity made its original offer, it was a reasonable premium to the recent trading price of Southern Union, but still a rather good bargain for ETE. Making matters worse, it was a convoluted offering - Southern Union shareholders would receive Series B units that would yield at least 8.25%, but there was a somewhat complicated decision tree that could result in shareholders eventually getting cash, ETE common, Energy Transfer Partners (NYSE:ETP) common, or continuing to hold those Series B units. Some of these permutations would give SUG shareholders a tax-free acquisition premium.

In contrast, the Williams bid is a straight-up all-cash deal that is not only much simpler, but worth 18% more to SUG shareholders. The downside here, though, (as Energy Transfer Partners has duly pointed out) is that the Williams bid is taxable and still at least partially contingent on due diligence.(To help you profit from this deal, read Mergers & Acquisitions: An Avenue For Profitable Trades.)

Southern Union - Assets Worth Having
While both bidding parties may have been attracted by the undervaluation of SUG's assets and shares, there are strong business-based reasons for either to do this deal. Southern Union has valuable assets, including a west Texas gas gathering and processing business, and pipelines that stretch from Texas and Louisiana up to the border of Michigan, and another that goes from North Texas and Oklahoma through Missouri and into Michigan.

This would be a major acquisition for Energy Transfer, and would fundamentally transform the company, expanding the business into the Midwest and Florida and offering a very good compliment to ETE's existing Texas-focused operations. For Williams, it would create the dominant natural gas pipeline system for the Midwest and Northeast, and give it ownership interests in two pipelines running into Florida.

In either case, the pipeline assets themselves would likely be moved on to other businesses - Williams would likely pass the pipelines Williams Partners (NYSE:WPZ), while Energy Transfer would likely drop them to Energy Transfer Partners or Regency Energy Partners (Nasdaq:RGNC). In both cases, doing this could allow the parent company to effectively fund part of the deal cost through the secondary markets. (For more on why this deal could work, see What Makes An M&A Deal Work?)

Others Could Crash This Party Too
As Williams' offer in the high $30s is just barely at fair value (and thus doesn't include synergies that could be significant for a buyer) a still-higher offer could come. Kinder Morgan (NYSE:KMI), for instance, could have a real interest in Southern Union, and other names like Dominion (NYSE:D), Oneok (NYSE:OKE) and Sempra (NYSE:SRE) could be interested as well, though the thought of a bidding war may keep them on the sidelines.

The Bottom Line
At this point, there is little for Southern Union shareholders to do but watch and wait to see which bid comes out on top. If it were a choice today between the two bids, some of the decision would have to come down (in part) to each investor's individual tax situation. Williams is offering a better price, but Energy Transfer's offer could be superior on an after-tax basis and the option of getting paid in ETE or ETP shares means that SUG shareholders could share in the ongoing upside to what is a near-perfect geographical tie-up in some respects.

Time will tell if another bidder emerges, or if either Williams or Energy Transfer go higher to secure the deal, but this battle highlights two interesting lessons. First, productive undervalued assets don't stay hidden or overlooked indefinitely. Second, overpaying for a deal is bad, but underbidding can be dangerous if it encourages other buyers to try break your deal. (To help you determine what this merger can mean to your portfolio, check out The Merger - What To Do When Companies Converge.)

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