Energy Transfer Equity (ETE) raised its offer for Southern Union (SUG) to $8.9 billion in stock and cash, thwarting rival bidder Williams Cos. (WMB).

The offer trumps Williams $39-a-share all-cash bid in June, which was valued at about $4.9 billion. Energy Transfer had initially offered $33 a share in stock, or $4.2 billion.

The revised bid, which was announced on Tuesday, has been approved by both companies boards of directors. The deal represents a 42% premium from Southern Unions closing price on June 15, the last day of trading before the deal was initially made public.

Energy Transfer also agreed to relinquish its rights to about $220 million of incentive distributions that it otherwise would be entitled to receive over four years.

We have listened to Southern Union shareholders and are providing a superior yet simpler transaction, including a significant cash component and the opportunity to benefit from Energy Transfers upside through the ownership of Energy Transfer common units, Energy Transfer chairman and largest shareholder Kelcy Warren said in a statement.

The combined company would be the largest natural gas pipeline operator in the U.S. and would likely enable the companies to better-transport natural gas.

Southern Union shareholders will be able to exchange their shares for $40 in cash each or 0.903 shares of Energy Transfer. Energy Transfer has received support agreements from shareholders representing 14% of Southern Union.

The deal is slated to close in the first quarter of 2012, pending regulatory anti-trust approvals and other customary closing conditions.

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