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Columbia Goes from Predator to Prey

Columbia Goes from Predator to Prey

Merrillville, IN-based NiSource confirmed yesterday what some observers have suspected for some time: that Columbia Energy Group's failed bid for Consolidated Natural Gas was partly a veiled attempt to protect itself from being targeted by a buyer. NiSource announced that it has had an offer for Columbia on the table since April 1 but has been rebuffed repeatedly and is making its hostile bid public in an effort to pressure Columbia's board.

"We're announcing this offer after a formal offer to the Columbia board of directors was rejected, repeated requests for discussion were ignored and Columbia's financial advisors informed us on May 28 that the company was unwilling to talk with us," said NiSource Chairman Gary L. Neale. "We believe that all constituencies will find this offer to be so compelling that Columbia's board will no longer be able to ignore it."

Accompanying its public announcement was a letter dated June 7 to Columbia CEO Oliver G. "Rick" Richard, in which Neale reiterated his company's $5.7 billion all-cash offer ($68/share). The bid is a 31% premium over a 20-day average of Columbia's share price as of last Friday and a premium to Columbia's all-time high stock price. NiSource also would assume about $2.25 billion in Columbia debt.

Neale said if Columbia's board does not respond, the next step would be a tender offer directly to Columbia's shareholders. "We are confident that your shareholders will enthusiastically support our proposal," Neale told Richard. He did not set a deadline for a Columbia response, however.

Richard immediately fired off a sharp retort, saying the company is "not for sale and is not interested in any merger transaction in which another company acquires control of Columbia. Our return to shareholders over the last three years supports our belief that the best long-term interest of Columbia and its shareholders is for Columbia to remain an independent company free to implement over time its strategic business plan.

"Nevertheless, in light of the formal nature of the offer set forth in your letter, your offer will be considered by our board of directors. After the consideration of your offer by our board, we will advise you of the board's conclusions," he said.

Richard's response seemed quite similar to the one he received from CNG a month earlier. After a three-month battle with Dominion Resources for CNG, Columbia finally accepted defeat on May 11, following Dominion's sweetened $6.4 billion offer and a revised agreement between CNG and Dominion. Columbia was offering $6.7 billion.

But Columbia vowed to continue growing its regulated business and its unregulated energy services and marketing arm, and said it planned to renew its search for a merger partner or a major acquisition that will keep it among the leading energy companies. The NiSource offer turns Columbia the predator into Columbia the prey, and according to some observers, the offer likely will attract other suitors.

"I think it's an excellent bid. I think it's a great idea and a great fit. Having said that, I've got a funny feeling this opens the door to a bunch more bids," said BT Alex. Brown energy analyst Ed Tirello. "Every big electric company is looking, all the guys with cash. I mean you have First Energy, GPU. You've got Unicom, Cinergy. It probably will be one of the guys right there in the neighborhood. They're all flushed with cash.

"I'd bet that every investment banker that wasn't in the deal is now trying to get somebody to come into do the deal," Tirello added. "You've got management looking around for a white knight. They don't want to do the [NiSource] deal because they want to stay in the business or they want to own someone else; it's a natural reaction. This is the beginning of the story, not the end."

Donaldson, Lufkin & Jenrette energy analyst Curt Launer said he thinks the deal will be taken seriously by Columbia but in the end will be "too low to be successful." Launer estimated the NiSource bid to be 16.2 times 2000 earnings per share, eight times 2000 cash flow, 7.7 times 2000 EBITDA and 2.7 times Columbia's book value. "Our analysis shows all of these multiples to be below the ranges shown by recent deals, providing an opportunity for others to consider entering the bidding for CG, and/or NI to increase its bid."

Merrill Lynch analyst Donato Eassey came to the same conclusion. "It's a decent offer. But I think Columbia will go for a higher number if they go at all," he said. "The fact of the matter is $68/share is a good number but $73 is probably the right number in terms of what the company is worth as we speak." Eassey said fundamentally Columbia's stock is worth close to $70 on 2000 earnings forecasts. "There are people suggesting it's worth as much as $82/share. I'm not there." But NiSource likely will have to increase its bid and does seem willing to do so "if its reasonable," Eassey added. "They're trying to buy it cheap still. This is the bottom of the first inning."

Eassey likes the strategy behind the transaction. "I love geographic diversification. I think the management of [NiSource] has done a very good job at accumulating assets that are going to add value. You have to have as critical a mass size as you can get in order to be competitive in the energy world today."

NiSource's Neale also stressed the strategic value of a combination. He said it would complete the formation of a "natural gas distribution corridor" between Chicago and New England and between the Gulf Coast region and the Northeast. NiSource closed on a $780 million acquisition of Massachusetts-based Bay State Gas Co. in February and in April completed a $150 million purchase of TPC Corp., which owns a network of high-deliverability salt cavern storage in the eastern U.S.

"This combination will create a super-regional powerhouse capable of earnings growth in excess of 12% per year primarily from our core businesses," said Neale. "For Columbia's shareholders, the offer represents full and fair value in a six- to nine-month time frame with little regulatory risk. For NiSource's shareholders, this transaction is accretive in the first 12 months with minimal synergies required." Neale predicted there would be no layoffs from core operational groups.

The combination would more than double the size of NiSource, creating a company with a market capitalization of $8.3 billion. It would be one of the largest energy distribution companies in the country with nearly 4 million electric, gas and propane distribution customers, 19,000 miles of pipelines connecting the Texas Gulf Coast and the Atlantic coast, 700 Bcf of total storage capacity, and 800 Bcf of gas reserves. The acquisition would require shareholder approval as well as authorization from the SEC, FERC and five state regulatory agencies.

Columbia's stock price soared 13%, or $7.25, on the news yesterday to $63/share. NiSource stock fell 2%, or $0.69, to $27.50/share.

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