Williams Swoops In on Energy Transfer's Bid for Southern Union

Earlier this year, when WilliamsCompanies approached Southern Union to talk about acquiring the company, the two sides didn't make much headway, say people familiar with the approach.

Natural Gas

But it was still something of a surprise to Williams that Southern Union would sign a deal to be acquired only a few months later without even reaching out to Williams.

That, of course, is what happened: Southern Union agreed to be acquired by Energy Transfer in a complex deal worth $33 a share, about $4.2 billion, on June 16 without shopping the company.

And so late Thursday, one week after that deal was announced, Williams came bounding in with an overbid of $39 a share in cash.

We have yet to hear a response from Southern Union since the Williams bid was announced. But given it's a Delaware corporation and its deal with ETE seems to imply Revlon duty, there is a likelihood it will go to the highest bidder.

A Revlon duty occurs when, after a company agrees to a deal with a change in control of ownership, it is obligated to consider higher offers should they appear.

At present, despite ETE saying it still believes its deal is superior, that does not appear likely.

Energy Transfer's deal is a complex one in which Southern Union shareholders receive a partnership unit that will yield 8.25 percent and is said to be worth $33. But while it can be called by ETE at $33 during that period and holders can then elect whether to receive cash or units of ETE, it offers no upside during that first year.

After year one, there is potential upside given the exchange ratio becomes fixed at .77.

Many of SUG's current shareholders can't even hold the unit's being offered by ETE because as non-tax paying institutions they can't hold up MLP (master limited patnerships) units—meaning they need to sell prior to close.

If Williams succeeds in acquiring SUG, its two top managers will see their combined 13.4 percent stake in the company get a nice bump in value.

But they will be leaving behind a gold-plated consulting deal SUG struck with ETE. Under the deal, both managers would receive payments of $10 million a year for five years and continue to have use of the corporate plane no doubt.

While that would seem to be a reason no other companies were invited to buy Southern Union, to its credit the company did set up a special committee to deal with any other bids and set the breakup fee at a low 2.25 percent—if, as has proved the case, it got another bid within 40 days.

Follow David on Twitter:

@DavidFaberCNBC

Questions? Comments? Write to [e-mail].