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Columbia Tries to Wrest CNG from Dominion's Grip

Columbia Tries to Wrest CNG from Dominion's Grip

The sharp decline in the value of Dominion Resources' proposed acquisition of Consolidated Natural Gas, prompted Columbia Energy Group to make public its intentions to break up the transaction with a competing $6.7 billion bid over the weekend.

In a conference call yesterday detailing the unsolicited offer, Columbia CEO Oliver G. Richard presented a long list of reasons his company's bid is far superior to Dominion's. Richard said on Feb. 20, Columbia unsuccessfully tried to convince the CNG board its bid was the better one. "We are pursuing this transaction on a negotiated basis and we will withdraw our offer on May 3 if CNG does not respond to us favorably by then."

Dominion announced its friendly takeover of CNG in February. At the time, the convergence transaction, which would form the nation's fourth largest gas and electric utility company with four million customers, was valued at about $6.3 billion. But since then it has cascaded down in value to about $5.8 billion. The company plans to promote the deal in an upcoming road show designed to stem the sharp drop in value. It also announced a corporate restructuring yesterday in preparation for the combination and for electric restructuring in Virginia.

But Columbia's $70/share offer, consisting of $24.50 in shares of Columbia and $45.50 in cash, represents a 21% premium to Dominion's stock offer and 25% premium to CNG's market price based on closing prices yesterday. The transaction also has a "higher probability of realizing" greater synergies, Columbia officials said yesterday, predicting about $350 million in annual savings, one third of which would go to ratepayers.

More than 85% of CNG's customer base is in the same states as Columbia's, Columbia CFO Michael W. O'Donnell noted. The remaining CNG customers are in states adjacent to Columbia's operations. The combined company would have more than 4 million customers. It also would be by far the largest gas storage operator in the country with about 750 Bcf of working gas capacity, or 23% of the total working gas capacity in the United States, according to data from the American Gas Association. The combined entity would have nine local distribution companies and would be the seventh largest independent gas and oil producer in the nation with 2.5 Tcfe of proved gas reserves. "It would be an excellent financial, strategic and cultural fit," said Richard.

Not true, said Dominion CEO Thos. E. Capps. "This hostile offer is an intentional distraction to the creation of America's premiere and first fully integrated electric power and natural gas company. Even minimal review shows Columbia's offer is not as attractive to CNG's shareholders as Dominion's."

Capps said the Columbia offer "contains few growth initiatives," would "not be tax-free, unlike our offer, and would be subject to capital gains tax." CNG shareholders would not benefit from Dominion's $3.90 dividend. "Columbia will offer the equivalent of only 40 cents per share." And the balance sheet of the combined company would be "strained by a more than 60% debt-to-equity ratio." He said it is hard to believe that earnings would be accretive in the second year of the Columbia deal, given that purchase accounting and goodwill amortization would cost the enterprise $130 million per year after tax, additional interest expenses would be in excess of $200 million after tax and the transaction costs would include a penalty payable to Dominion in excess of $200 million.

Capps also predicted "huge layoffs" and that antitrust laws might require divestiture of key Columbia and CNG assets. "Certainly, the proposed buyout will take much longer than Dominion's to get approved."

Richard admitted the Columbia transaction could take up to 20 months to process through all the regulatory channels, but he said Columbia expects no major regulatory roadblocks to the deal and no asset divestitures.

Ronald J. Barone of PaineWebber said despite the huge amount of storage, distribution and transportation assets being placed under one roof through a Columbia-CNG deal he doesn't expect any regulatory backlash. "No, I don't anticipate any regulatory problems with this merger. We're talking about regulated open access operations. Plus they say about one third of the savings will be going to ratepayers. That's got to make the regulators happy."

Barone said the Columbia offer is far superior to Dominion Resources' offer. "It's the price, mainly. We had a $68/share target for any takeover of CNG. [Columbia's offer] is $70 share. If you look at Dominion's stock price, it's a $60.01/share offer. I've got to believe for the stockholder's sake you take the Columbia offer. Columbia also has much greater earnings prospects than Dominion. I don't follow Dominion, but if you look at First Call, analysts generally have Dominion at 4% annual growth. We're expecting 10-11% annual earnings growth for Columbia."

Curt Launer of Donaldson Lufkin & Jenrette also liked the Columbia bid over Dominion's. "Our initial reaction to this news is favorable from the standpoint of the poor performance of CNG before and since it agreed to merge with Dominion Resources in a deal that values CNG at 1.52 shares of [Dominion stock] or about $60 currently.. Including an expected decline in [Columbia stock price] of about 10% on this news, in our opinion the [Columbia] bid is superior to the [Dominion] offer as it currently stands."

Dominion does not plan to sweeten its offer, spokesman Hunter Applewhite said late yesterday. CNG said it is reviewing the Columbia offer and will make a decision shortly.

Columbia, based in Herndon, VA, had 1998 revenues of nearly $6.6 billion. CNG had 1998 revenue of $2.76 billion. And Dominion had $6 billion in revenues last year.

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