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Insider Score LogoFrom InsiderScore: A hedge fund with an activist bent has been aggressively buying shares of Southern Union (NYSE:SUG), quickly becoming the pipeline and liquefied natural gas ("LNG") firm's largest outside shareholder. Monday morning it asked the company's management to unlock shareholder value through a number of proposed steps.

Sandell Asset Management, a multi-strategy hedge fund that has worked with billionaire Nelson Peltz to rattle the cages at Wendy's International (NASDAQ:WEN) and HJ Heinz (NYSE:HNZ) this year, disclosed this morning that it now holds 10.761M shares of SUG, or a 9.62% stake in the company, up from 2.227M shares, or a 2% stake, at the end of the first quarter.

Sandell began its run on SUG on May 1st, when it started buying the stock through a series of privately negotiated transactions (back-to-back call & put transactions with a financial institution, and call option exercises/put sales to a counterparty), picking up more than 2.2M shares in this manner through June 1st. Since the beginning of this month, Sandell has acquired another 6.8M shares of SUG through open market buys, including 239.7K shares at $25.60 to $25.78 on Friday, June 23rd. Thus far, Sandell has paid more than $264.62M, or about $24.59 per share, to build its stake in SUG.

In a letter to George Lindemann, SUG's chairman & CEO, Thomas Sandell, the CEO of Sandell Asset Management, said that SUG's current stock price "reflects a large and unwarranted discount to the intrinsic value of the Company that also does not recognize the strategic transformation of SUG from a regional gas utility to a natural gas-focused midstream & pipeline powerhouse."

To unlock this intrinsic value, Sandell suggested that SUG: 1) create a tax advantageous master limited partnership ("MLP"); 2) continue to sell its remaining local gas distribution utilities; and 3) raise its annual dividend to $1 per share to bring the company's dividend policy more in line with SUG's peers, and consider putting SUG up for sale.

"We believe the current intrinsic value of SUG to conservatively be $35 per share based on a variety of valuation metrics. While an increase in dividends will not meaningfully change the fundamental value of the Company, it will be an important catalyst in helping to narrow the currently large discount to fair value. Moreover, an MLP will provide greater value to stockholders given the tax-efficient nature of the structure, and we estimate the adoption of an MLP is likely to boost SUG's stock to $36-$41 per share," Sandell wrote.

SUG is no stranger to talk of transforming itself into a MLP. Last December, the company announced a $1.6B cash acquisition of pipeline operator Sid Richardson Energy, and on a conference call to discuss the deal, Lindemann said that SUG would consider the MLP structure. Around the same time, SUG said it would pay shareholders a cash dividend, ending a policy of issuing stock dividends. In late January, SUG sold one of its natural gas distribution units, and industry insiders believe the company is shopping its two remaining distributors.

"By selling off its natural gas distribution businesses, SUG can use the money to pay for slightly higher growth but lower risk LNG and pipeline assets. These long-life, annuity-like assets will allow SUG to ultimately convert itself into a MLP vehicle, thus unlocking value for shareholders," Bill Martin, editor of FindProfit.com, wrote in January.

Disclosure: Indie Research LLC, the parent company of InsiderScore.com, publishes FindProfit.com.

Once a staid utility, SUG has transformed itself into "toll-taker" with higher-growth LNG and pipeline assets. Two years ago, the company, in conjunction with a unit of General Electric (NYSE:GE), paid more than $2.4B to acquire CrossCountry Energy, the natural gas pipeline business of Enron. With the Sid Richardson deal, SUG is now the second-largest natural gas pipeline operator in the U.S., and the firm also owns the Trunkline LNG facility, which is one of the nation's largest importers of LNG.

Shares of SUG are getting a little boost today, as the stock hit a 52-week high of $26.34 this morning (just 31 cents off its March 2005 all-time high), and moved off of a November 2005, 52-week low of $21.66.

Worth Noting: As mentioned previously, Sandell has thrown its lot in with Peltz to try to effect change at WEN and HNZ. Thus far, they've been successful at WEN, but they're facing a more entrenched management team and culture at HNZ. The firm, nonetheless, has its share of activist success, but mostly overseas.

Thomas Sandell launched the firm, along with Casterligg Master Investments, in 1998. Sandell was the senior managing director for Bear Stearns' Risk Arbitrage Department previously, and Casterligg is mostly an arbitrage shop. A native of Sweden, Sandell was once that country's second-ranked badminton player.

Lindemann, meanwhile, is a billionaire, and a self-made one at that. He built his original fortune in the contact lens business, then moved into the cable television arena, and made his biggest splash in the cell phone business, selling Metro Mobile to what is now Verizon (NYSE:VZ) for $2.6B in 1992. According to SUG's latest proxy, Lindemann, his wife, and his son, Adam, own about a 10.8% stake in the company.

For what it's worth, Adam Lindemann is a noted art collector who has made the tabloids his home over the past few years thanks to a high-profile falling-out with his wife. He's reportedly now dating the granddaughter of the late Israeli defense minister Moshe Dayan. Adam's sister, Sloane, is married to Roger Barnett, the chairman and CEO of environmentally friendly beauty and household products market Shaklee. Brother George Jr., on the other hand, was once an Olympic hopeful in equestrian. Those dreams, however, were dashed in 1996 when he was convicted of fraud for having ordered the killing of a showhorse - by electrocution - to collect insurance money.

Source: Activist Hedge Fund Buying Southern Union Stock (SUG)