No wonder it’s hostile at Southern Union…

June 24, 2011

A takeover fight always makes for good sport, and so we were as excited as anyone* by the announcement yesterday that Williams Cos. (WMB) was making a $4.9 billion all-cash hostile bid for Southern Union (SUG), the pipeline company that announced its betrothal just last week to Energy Transfer Equity (ETE) in a $4.2 billion equity deal.

Shareholders are presumably thrilled at the prospect of a 17% sweeter bid, and more so at the potential for an all-out bidding war — remember how Dell and HP’s brawl over 3Par drove the selling price from an initial $1.2 billion to a final $2.3 billion? ETE is already condemning Williams’ higher bid as inferior, and we bet Williams will riposte before too long. (You can read the initial Williams offer letter for yourself.)

But we wonder if the Williams bid sparked the same kind of ebullience in Southern Union’s corner office, thanks to an ETE filing on Monday, spotted by our intern, Andy. (That makes this a good time to introduce Andy Cheng — scroll down at the link for his bio.) The 8-K was filed by ETE to disclose terms of the proposed deal, but even a quick read shows there’s plenty in it to make it easier for top Southern Union executives to stick with the suitor that brung them, quite aside from that whole shareholder-value thing.

In among the 301 pages of filing and attachments are consulting agreements and non-competition agreements with George L. Lindemann, Southern Union’s chairman and chief executive, and with Eric D. Herschmann, vice-chairman and chief operating officer. (Here are Lindemann’s consulting and noncompetition agreements, and Herschmann’s consulting and non-competition agreements.)

Each man will get $3 million a year for five years, with the obligation to work at most 40 hours a week the first year, 30 hours the second year, and 20 hours each year after that — for an average hourly rate of more than $2,200. On top of that, each executive will also get “a non-competition fee of $7.0 million per year for each of the five years.” (You might think paying someone $15 million would be enough to get their loyalty, but that’s why you’re probably not a high-powered compensation consultant.)

As nice as $50 million apiece in cash undoubtedly is — neither executive has made more than $7.7 million a year, all in, during the last three years — it’s only the beginning. There’s still the matter of perks. Dip a little deeper into the consulting agreements and you’ll find plenty, including:

  • the transfer of “all right, title or other ownership interest the Company may have” in club memberships and life-insurance policies currently owned by the company (though no club memberships are mentioned in Southern Union’s latest proxy);
  • the right to keep using their current offices and parking spaces “expressly including at the Company’s offices in New York City, Houston and Palm Beach,” as well as the right to the services of administrative assistants of their choice;
  • the continued use, “with full technical support, all at the expense of the Company,” of any gizmos they have, including “without limitation personal computers, blackberry, and mobile telephones and electronic communications devices” (what, no iPad?);
  • medical and dental coverage;
  • 30 days vacation, in addition to religious and national holidays; and
  • use of ETE’s aircraft, at company expense, “for any and all business and personal travel on terms no less favorable than currently.” They’re still supposed to stay within any existing annual caps, but Southern Union’s proxy doesn’t list any caps; it simply says that “Mr. Lindemann and his spouse are encouraged to use Company aircraft for all business and non-business purposes for their personal security and safety” and notes that they racked up $237,137 in personal rides at company expense on corporate and charter aircraft.

Oh, and if ETE decides for some reason to can the consultants without cause (narrowly defined), they still get all of the above (or the equivalent), including the paychecks, for the remainder of the 5-year term.

Are there no limits to ETE’s largesse? Of course there are. For example, the agreements stipulate that any individual expense over $10,000 “shall require prior approval” for reimbursement. (A relief to ETE’s shareholders, no doubt.)

The two men have also signed an agreement supporting the ETE bid — yet another reason they might prefer ETE to Williams Cos.

We do note that Lindemann, Herschmann and their families together own a little over 13.4% of Southern Union. In back-of-the-envelope terms, that stake would be worth more than $563 million in ETE’s $4.2 billion deal; in a $4.9 billion deal like the one Williams is proposing, it would be worth roughly $657 million. The difference of $94 million is just a hair under the cash portion of Lindemann and Herschmann’s consulting and non-competition arrangements with ETE.

Of course, if a real bidding war erupts, all bets are off.

* Well, maybe not quite as excited as whoever picked that mud-wrestling photo for the blog post on the bid over at the WSJ’s Deal Journal. Or maybe we can learn something about attracting a Wall Street audience…

Image source: Southern Union website

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