The saga over the future of Southwest Gas Holdings Inc. took another turn when the company revealed that a potential buyer is interested in acquiring the Las Vegas-based gas utility operator at a premium to activist investor Carl Icahn's latest offer.

Southwest Gas on April 18 announced that its board has authorized a review of strategic alternatives after receiving an indication of interest, often the first step in a buyout. Executives will consider an outright sale of Southwest Gas, a separate sale of the holding company's business units, and a previously announced spinoff of energy infrastructure services subsidiary Centuri Group Inc.

The announcement could tee up the latest gas utility sale following a string of recent deals that attached lofty valuations to local distribution companies, or LDCs. Infrastructure investment funds have driven the dealmaking, most recently through an $8.1 billion deal to take South Jersey Industries Inc. private.

It could also upend the strategy that Southwest Gas outlined over the past six months as it sought to grow its regulated natural gas transportation business while fending off Icahn's takeover bid.

According to Southwest Gas, the indication of interest valued the company "well in excess" of Icahn's tender offer of $82.50 per share, which the board had determined was inadequate. The company's stock price closed 5.7% higher at $88.22 per share on April 18 after touching a 52-week high at $90.70 in a recent streak of volatility.

3 main business lines could be on the block

An outright sale would give the buyer control of three major business lines. At its core, Southwest Gas operates gas utilities in Arizona, California and Nevada through Southwest Gas Corp. The business line also includes Great Basin Gas Transmission Co., formerly Paiute Pipeline Co., which operates an 898-mile interstate gas transmission line and a liquefied natural gas facility for peak shaving.

Southwest Gas substantially expanded its midstream operations through its nearly $2 billion acquisition of Dominion Energy Questar Pipeline LLC, recently rebranded as MountainWest Pipeline LLC. The company operates gas transmission lines and storage facilities in Utah, Wyoming and Colorado, connecting Rocky Mountain production to West and Midwest markets, including Questar Gas Co., Dominion Energy Inc.'s LDC serving Utah and parts of Idaho and Wyoming.

MountainWest also operates the Rocky Mountain region's largest underground storage reservoir at the Clay Basin storage facility in northeast Utah. The company holds a 50% stake in White River Hub LLC in Colorado, a joint venture with Enterprise Products Partners LP that offers firm and interruptible gas transportation service.

A sale of MountainWest would mark another twist for the former Dominion assets. Berkshire Hathaway Energy initially purchased them as part of a larger acquisition of Dominion's midstream business, but antitrust concerns created the opportunity for Southwest Gas to acquire this part of the business. Southwest Gas executives have pitched MountainWest as a cash flow machine that will support investment growth, reward shareholders and diversify the company's regulated earnings.

Centuri is the third major operating segment. Southwest Gas entered the industry through its purchase of infrastructure construction company NPL Construction Co. in 1996. Since then, it has grown and diversified the rebranded Centuri business through M&A, culminating in its $855 million acquisition of Riggs Distler & Co. Inc. in 2021.

Southwest Gas strategy, proxy battle interrupted

Southwest Gas intends to operate its regulated natural gas distribution, transmission and storage assets as a single publicly traded company and spin off Centuri. With the Questar and Riggs Distler acquisitions, Southwest Gas executives said the segments had achieved the scale necessary to achieve optimal shareholder value on their own.

Icahn's bid to take control of Southwest Gas, fueled by opposition to the Questar deal, has complicated the company's plans since October 2021. Icahn argued for selling off the Questar assets and Centuri rather than issuing $900 million to $1 billion of equity to fund the midstream acquisition. The investor also criticized Southwest Gas's board and management, saying his slate of board nominees could unlock additional value in the utility segment.

Southwest Gas announced its intention on March 1 to separate Centuri, saying the move would reduce its equity needs. On March 28, the company announced it had raised about $392.5 million in an equity offering. Southwest Gas said in an April 7 letter to stockholders that it would not need to issue further equity to support the Questar purchase in light of anticipated proceeds from the Centuri spinoff.

The moves have failed to ameliorate Icahn's concerns. In an April 19 letter to investors, Icahn cast doubt on the motives behind the strategic review and urged stockholders to back his board nominees ahead of the company's May 12 annual meeting.

"Yesterday’s announcement by SWX appears to be a continuation of the desperate defense 'strategy' that has been employed thus far by the incumbent board of directors and management team," Icahn said. "SWX will now have you believe that they are running a legitimate process to explore strategic alternatives."

Icahn could profit handsomely should Southwest Gas reach a buyout deal that surpasses his offer. Icahn Capital LP was Southwest Gas's fourth-largest shareholder as of Dec. 31, 2021.

Michael Melarkey, chair of the Southwest Gas board, said the company plans to move forward "expeditiously" with the strategic review. The company did not intend to make any further public statements about the process until it is complete or until executives determine that they need to issue disclosures.

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