Sandell Asset Management Raises Stake in Southern Union (SUG), Wants Steps Taken to Increase Shareholder Value
In an amended 13D filing on Southern Union Company (NYSE: SUG), Sandell Asset Management disclosed a 9.8% stake (11.75 million shares) in the company. This is up from the 10.87 million share stake the firm disclosed for the quarter ended September 30, 2006. The firm also disclosed a letter sent to the company asking the board to put forth concrete steps to enhance stockholder value and close the valuation gap between the stock price and what the firm believes to be the Issuer’s intrinsic value.
The firm said in the absence of a plan from the Issuer, they plan to put forth various proposed initiatives for value creation and openly requested input from the board. If the board remains unwilling to restructure the company in a manner more conducive to public market value creation, the firm urged the board to put the company up for sale.
The firm believes the intrinsic value of the company is $35 per share. They also illustrated how the Company could be worth in the $36-$41 per share range through the creation of a Master Limited Partnership (MLP) and increasing annual dividends to $1.00 per share.
The firm also delivered a letter to the Issuer informing the Issuer of its intention to appear in person or by proxy at the Issuer’s 2007 annual meeting of stockholders to nominate the Nominees for election to the board of directors and to move a proposal to repeal any amendments to the Issuer’s bylaws unilaterally adopted by the board after May 9, 2005 and prior to the election and qualification of the directors elected at the annual meeting.
The firm also filed a complaint in the Court of Chancery of the State of Delaware in and for New Castle County in which it, among other things, charges that Article II, Section 13 of the Issuer’s bylaws is invalid and asks that the court declare the provision invalid as a matter of law and permanently enjoin the application of the provision to any attempt by Castlerigg Master Investments to nominate one or more individuals as candidates for director of the Issuer.
A Copy of the Letter:
Attention: Mr. George L. Lindemann
Chairman and Chief Executive Officer
Dear Mr. Lindemann et al:
Sandell Asset Management Corp. (“SAMC”) and the private investment funds advised by SAMC (collectively with SAMC, the “Sandell Funds”) are the beneficial owners of 11,750,714 shares of common stock of Southern Union Company (“Southern Union”, “SUG” or the “Company) representing approximately 9.8% of SUG’s total outstanding shares, making the Sandell Funds the Company’s largest single shareholder.
As you will recall, we sent a letter to the Board of Directors on June 27, 2006 outlining alternatives that management and the Board could take to narrow the very significant gap between the SUG stock price (then $26.26) and what we believe is its intrinsic value of $35 per share. Furthermore, we illustrated how the Company could be worth in the $36-$41 per share range through the creation of a Master Limited Partnership (MLP) and increasing annual dividends to $1.00 per share.
Five months have elapsed and there has been a lack of constructive response to our position. Our suggestions and sincere efforts to work collaboratively with the Company have increasingly been met with little more than posturing. While you may seek to take some comfort in the fact that, in the interim, SUG’s stock price has risen to $28.03, we believe the significant portion of that increase is no doubt attributable to the market’s hope that our prodding will cause you to take action to enhance value. And in any case, the more telling fact is that, once again, the stock has underperformed its peers over the same period. From time to time the Company has paid lip service to the creation of a MLP, but this is far from the concrete action that is necessary to deliver value to shareholders. We find it unconscionable that the Board has failed to put forth anything resembling a concrete plan to close the Company’s valuation gap. In our experience, well governed companies that take their responsibility to shareholders seriously detail specific plans for value creation and allow management and the Board to be graded against such goals. Regrettably, we have seen no such plan from SUG and can only assume that one does not exist.
In the absence of a plan from the Company, as major investors, we have taken it upon ourselves to put forth various initiatives for value creation. We believe that Southern Union has the opportunity to create up to $12 per share of incremental value through a straightforward three-step restructuring of the Company. Specifically, our plan calls for 1) a sale of the remaining LDC assets as soon as practicable; 2) the creation of a MLP with the Trunkline LNG terminal; and 3) an increase in annual dividends to $1.00 per share. Based on our calculations, the first two steps would be both accretive to earnings (2008E) and deleveraging, giving Southern Union the necessary flexibility to increase the dividend to a level consistent with its public company peers as well as to fund increased share repurchases.
We firmly believe that Southern Union has a very valuable collection of assets and that the market currently does not fully reflect the value of these assets. It is now time to take concrete actions to realize and maximize the value of SUG. If the Board is unwilling to restructure the Company in a manner more conducive to public market value creation, we urge the Board to put Southern Union up for sale.
We have set forth more specific details of our proposal in the attached analysis. Although we are confident in the feasibility of our plan, we welcome (and are openly seeking) your input. We believe the Board now faces a critical choice in the future of the Company - either continue to stonewall shareholders and look for ways to criticize our plan without offering any concrete alternative, or begin a new era of communication and collaboration that can enhance the value of SUG for the benefit of all shareholders.
We remain open and available to working constructively with the Board and management to enhance value at Southern Union since we both have a significant vested interest in seeing the valuation improved. However, in light of the lack of cooperation that we have received to date and the Board’s failure to put forth its own concrete plan, as well as various deficiencies in the Company’s corporate governance that cause us great concern, we believe it is imperative that we take concrete action in an effort to encourage the Company to take the necessary steps to maximize value for all of the Company’s stockholders. As you know, certain entrenchment provisions in the Company’s By-Laws purport to strip stockholders of their right under Delaware law to nominate director candidates. We believe these provisions are invalid under applicable law and today we commenced litigation in the State of Delaware seeking to have them declared invalid. Should such provisions be enforceable and applicable to direct stockholder nominations, and we believe they are not, notice of director nominations would need to be provided at least four months in advance of the anniversary date of last year’s proxy statement – which in this case means on or before December 6, 2006. Accordingly, in order to preserve our right as stockholders to nominate directors, that notice is being provided to the Company today under separate cover. As you will see in the notice, we do not seek control of Southern Union and intend to nominate candidates who, if elected, will only constitute a minority of the full Board.
We hope that the Company will take appropriate action such that the time and expense of a costly and distracting proxy contest will not, in fact, be required.
We look forward to hearing from you promptly and can be reached at (212)XXX-XXXX
Sincerely,
Thomas Sandell
Chief Executive Officer
Sandell Asset Management Corp.
The firm said in the absence of a plan from the Issuer, they plan to put forth various proposed initiatives for value creation and openly requested input from the board. If the board remains unwilling to restructure the company in a manner more conducive to public market value creation, the firm urged the board to put the company up for sale.
The firm believes the intrinsic value of the company is $35 per share. They also illustrated how the Company could be worth in the $36-$41 per share range through the creation of a Master Limited Partnership (MLP) and increasing annual dividends to $1.00 per share.
The firm also delivered a letter to the Issuer informing the Issuer of its intention to appear in person or by proxy at the Issuer’s 2007 annual meeting of stockholders to nominate the Nominees for election to the board of directors and to move a proposal to repeal any amendments to the Issuer’s bylaws unilaterally adopted by the board after May 9, 2005 and prior to the election and qualification of the directors elected at the annual meeting.
The firm also filed a complaint in the Court of Chancery of the State of Delaware in and for New Castle County in which it, among other things, charges that Article II, Section 13 of the Issuer’s bylaws is invalid and asks that the court declare the provision invalid as a matter of law and permanently enjoin the application of the provision to any attempt by Castlerigg Master Investments to nominate one or more individuals as candidates for director of the Issuer.
A Copy of the Letter:
Attention: Mr. George L. Lindemann
Chairman and Chief Executive Officer
Dear Mr. Lindemann et al:
Sandell Asset Management Corp. (“SAMC”) and the private investment funds advised by SAMC (collectively with SAMC, the “Sandell Funds”) are the beneficial owners of 11,750,714 shares of common stock of Southern Union Company (“Southern Union”, “SUG” or the “Company) representing approximately 9.8% of SUG’s total outstanding shares, making the Sandell Funds the Company’s largest single shareholder.
As you will recall, we sent a letter to the Board of Directors on June 27, 2006 outlining alternatives that management and the Board could take to narrow the very significant gap between the SUG stock price (then $26.26) and what we believe is its intrinsic value of $35 per share. Furthermore, we illustrated how the Company could be worth in the $36-$41 per share range through the creation of a Master Limited Partnership (MLP) and increasing annual dividends to $1.00 per share.
Five months have elapsed and there has been a lack of constructive response to our position. Our suggestions and sincere efforts to work collaboratively with the Company have increasingly been met with little more than posturing. While you may seek to take some comfort in the fact that, in the interim, SUG’s stock price has risen to $28.03, we believe the significant portion of that increase is no doubt attributable to the market’s hope that our prodding will cause you to take action to enhance value. And in any case, the more telling fact is that, once again, the stock has underperformed its peers over the same period. From time to time the Company has paid lip service to the creation of a MLP, but this is far from the concrete action that is necessary to deliver value to shareholders. We find it unconscionable that the Board has failed to put forth anything resembling a concrete plan to close the Company’s valuation gap. In our experience, well governed companies that take their responsibility to shareholders seriously detail specific plans for value creation and allow management and the Board to be graded against such goals. Regrettably, we have seen no such plan from SUG and can only assume that one does not exist.
In the absence of a plan from the Company, as major investors, we have taken it upon ourselves to put forth various initiatives for value creation. We believe that Southern Union has the opportunity to create up to $12 per share of incremental value through a straightforward three-step restructuring of the Company. Specifically, our plan calls for 1) a sale of the remaining LDC assets as soon as practicable; 2) the creation of a MLP with the Trunkline LNG terminal; and 3) an increase in annual dividends to $1.00 per share. Based on our calculations, the first two steps would be both accretive to earnings (2008E) and deleveraging, giving Southern Union the necessary flexibility to increase the dividend to a level consistent with its public company peers as well as to fund increased share repurchases.
We firmly believe that Southern Union has a very valuable collection of assets and that the market currently does not fully reflect the value of these assets. It is now time to take concrete actions to realize and maximize the value of SUG. If the Board is unwilling to restructure the Company in a manner more conducive to public market value creation, we urge the Board to put Southern Union up for sale.
We have set forth more specific details of our proposal in the attached analysis. Although we are confident in the feasibility of our plan, we welcome (and are openly seeking) your input. We believe the Board now faces a critical choice in the future of the Company - either continue to stonewall shareholders and look for ways to criticize our plan without offering any concrete alternative, or begin a new era of communication and collaboration that can enhance the value of SUG for the benefit of all shareholders.
We remain open and available to working constructively with the Board and management to enhance value at Southern Union since we both have a significant vested interest in seeing the valuation improved. However, in light of the lack of cooperation that we have received to date and the Board’s failure to put forth its own concrete plan, as well as various deficiencies in the Company’s corporate governance that cause us great concern, we believe it is imperative that we take concrete action in an effort to encourage the Company to take the necessary steps to maximize value for all of the Company’s stockholders. As you know, certain entrenchment provisions in the Company’s By-Laws purport to strip stockholders of their right under Delaware law to nominate director candidates. We believe these provisions are invalid under applicable law and today we commenced litigation in the State of Delaware seeking to have them declared invalid. Should such provisions be enforceable and applicable to direct stockholder nominations, and we believe they are not, notice of director nominations would need to be provided at least four months in advance of the anniversary date of last year’s proxy statement – which in this case means on or before December 6, 2006. Accordingly, in order to preserve our right as stockholders to nominate directors, that notice is being provided to the Company today under separate cover. As you will see in the notice, we do not seek control of Southern Union and intend to nominate candidates who, if elected, will only constitute a minority of the full Board.
We hope that the Company will take appropriate action such that the time and expense of a costly and distracting proxy contest will not, in fact, be required.
We look forward to hearing from you promptly and can be reached at (212)XXX-XXXX
Sincerely,
Thomas Sandell
Chief Executive Officer
Sandell Asset Management Corp.
Labels: Sandell Asset Management, SUG
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