El Paso Energy Corp., Houston, and Sonat Inc., Birmingham, Ala., have signed a definitive merger agreement, creating a U.S. natural gas powerhouse with a total enterprise value of more than $14 billion.
The proposed deal is valued at an estimated $6 billion, including the assumption of $2 billion in Sonat debt. It involves a 1-for-1 stock swap and will be accounted for on a pooling-of-interests basis. It is expected to close in the third or fourth quarter of this year.
If approved, the transaction will create a firm with a broad range of assets in interstate and intrastate gas transmission, gas gathering and processing, energy marketing, and power generation (see map).
The new firm will retain the El Paso Energy name. It will be based in Houston, although Sonat's Southern Natural Gas Co. unit will remain in Birmingham.
Combined assetsEl Paso will contribute to the deal its five business units-Tennessee Gas Pipeline, El Paso Natural Gas, El Paso Field Services Co., El Paso Energy Marketing Co., and El Paso Energy International. El Paso also owns an interest in Leviathan Gas Pipeline Partners LP (OGJ, Jan. 25, 1999, p. 47).
Sonat will contribute to the deal its Southern Natural Gas Co., Sonat Exploration Co., Sonat Marketing Co. LP, and Sonat Power Marketing units.
"Our combined interstate transmission systems alone will consist of an impressive 40,000 miles of pipeline, reaching all the major growth areas in the country and moving more gas than any other U.S. company-nearly a quarter of all natural gas transported in the U.S. every day," said William A. Wise, chairman of El Paso Energy.
"Our merged interstate pipeline systemsellipsewill tap the most prolific supply basins in North America and access the largest and fastest growing natural gas markets in the U.S., including Florida and other key southeastern states," Wise continued. "New gas-fueled power generation development is particularly active in these areas."
PaineWebber Inc., New York, said that, based on third quarter 1998 data, the addition of Sonat's assets would give El Paso Energy the largest number of interstate pipe miles in the U.S. industry-40,600 vs. No. 2 Enron Corp.'s 32,000.
The merged company would also transport the largest volumes of natural gas in the U.S., at 12.4 bcfd, followed by Williams at 9.2 bcfd. And it would be the third largest physical marketer of natural gas, with 6.4 bcfd, says PaineWebber, and a top-five power marketers, at 18.8 million MW-hr: "El Paso will now have over 4,000 MW of generation capacity already in operation or under construction, with another 7,000-8,000 MW in various stages of development."
Transaction termsThe agreement between Sonat and El Paso includes customary non-solicitation, termination fee, and expense reimbursement provisions, says El Paso. And each company has granted the other an option to purchase up to 19.9% of its outstanding common stock should the agreement be terminated under certain circumstances.
El Paso has agreed that, if its stockholders do not approve the merger, it will issue 19.9% of its outstanding common stock as merger consideration, with the balance of the merger consideration paid in non-convertible, long-term preferred stock. This condition was added "to provide Sonat stockholders greater certainty that the transaction will be completed," said El Paso.
"This merger is consistent with our ongoing strategy of maintaining future growth through seeking significant acquisitions and mergers within our industry," said Wise. "Three years ago, we purchased Tenneco Energy in what has come to be regarded as the most successful merger within the pipeline industry. We expect to realize similar benefits from the combination with Sonat.
"The merger will be earnings and cash-flow accretive in the year 2000-the first full year of operations-and beyond."
Following the merger, Wise will retain his current position of chairman, president, and CEO of El Paso Energy. Sonat Chairman, Pres., and CEO Ron- ald L. Kuehn Jr. will be non-executive chairman until Dec. 31, 2000.
The board will consist of nine members designated by El Paso and six chosen by Sonat.
ReactionThe investment community is, in general, viewing the planned merger positively.
PaineWebber Inc. said, "In addition to cost savings/synergies, the merger provides El Paso with enhanced growth opportunities, as it will now serve the rapidly growing southeastern (U.S.) demand for natural gas and electricity-particularly Florida.
"After meeting with the top management team of El Paso Energy, we believe acquiring Sonat makes a great deal of sense and that it will be accretive to (El Paso's) Year-2000 earnings," PaineWebber continued.
Moody's Investors Service has placed the long-term debt ratings of El Paso on review for possible upgrade, and the long-term ratings of Sonat on review for possible downgrade.
"As no additional debt is planned as part of the transaction, and operations of the two companies complement each other, Moody's views the transaction overall as slightly positive.
"Moody's Baa1 rating for Sonat's senior debt had a negative outlook prior to the merger announcement, reflecting Sonat's increased emphasis on riskier exploration drilling, its higher debt levels and lower coverage ratios, as well as persistently low prices for oil and natural gas. El Paso Energy's income and cash flows are predominantly from its regulated pipeline operations, but the company has been expanding its gathering and processing, marketing and trading, and international segments," said Moody's.
PaineWebber summed up the wisdom of El Paso, a natural gas transmission company, acquiring Sonat's significant E&P assets: "In short, (El Paso) is acquiring Sonat's E&P program at a very attractive price of near $1/proved McfeellipseThough there appears to be some benefits from owning its own equity production, such as providing supply certainty and enhanced gathering opportunities-particularly with Leviathan-we do not believe El Paso will make E&P a key growth driver. Furthermore, once synergies are exploited and the liquidity of the North American natural gas marketing grid improves further, we would not rule out a full divestment of E&P at some point down the road."
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