I'm guessing it worked one of two ways.
Number one:
South German Confederation united most of Germany, could not form Germany because they didn't quite have enough states, and for the major unification Austria was still a competing unification candidate.
Austria, being the other unification candidate, launched a unification war against the SGC. Austria won, which knocked the SGC out of contention for unification. With only one unification candidate left, Austria can now unify Germany. They do so.
However, we are told that fellow Great Powers do not get annexed when a country does a major unification. But, for situations like this where the prospective major unification area is effectively divided between two Great Powers, the developers still wanted something more to happen than just Austria changing tag to Germany, since that's normally what would happen in this instance. So they maybe have Austria when unifying Germany get some amount of the SGC's land within the major unification area. But for whatever reason, maybe inherited claims or some such from Bavaria, Austria does not annex those states and the SGC is left with them after the unification occurs.
Number two:
Similar to number one, but instead of a unification war, Austria launches a Cut Down To Size play against the SGC. The SGC is likely very infamous after conquering all of this land in order to unify Germany, and Austria sees the change to reverse those gains. Now, when we heard about the Cut Down To Size wargoal in the Diplomatic Plays dev diary, it forces them to relinquish every state they did not possess 20 years prior. That, more than anything tweaked in the unification war case, would explain why the SGC still keeps Bavaria's state regions since it was formed by Bavaria. Then, once that play ended, again the unification mechanic kicks in. Austria is now able to unify Germany since enough countries in Germany support them as the unification candidate (or if they got all the land in the Cut Down To Size play, Austria now possesses 26 of the 30 state regions in Germany, which is over the 20 state region threshold). But, either since the SGC is still a Great Power in the major unification or Austria formed it by regular unification, the SGC did not get annexed into the new Germany.