Columbia Tells NiSource To Hit the Road, Again
Columbia Energy Group's (CG) board once again told NiSource, in
no uncertain terms, to take a hike last week and urged CG
shareholders to reject NiSource's $68/share ($5.7 billion) hostile
takeover offer. NiSource took its offer to shareholders June 25 and
said it will continue to fight for the deal. It had no tally of
shares tendered as of last week but said numbers would be available
In a sharply worded letter to NiSource Chairman Gary Neale,
Columbia CEO Oliver G. (Rick) Richard said NiSource's series of
unsolicited proposals "have been for the wrong price, at the wrong
time, and with the wrong company." He reiterated that Columbia is
"not for sale," adding that a merger of the two companies "is not
"Columbia has unique and highly attractive assets located in
high-demand markets on the East Coast. NiSource's existing
businesses appear to consist primarily of high-cost generation
assets serving low-growth markets," Richard told Neale. "Columbia
has a talented and experienced management team that has developed a
strong, forward-looking strategy. NiSource has yet to prove its
ability to compete successfully in an increasingly deregulated
But the bottom line is Columbia's board still believes the
NiSource offer is "inadequate from a financial point of view," and
many of its "largest shareholders and the analysts covering our
industry" agree, Richard said.
After careful review of NiSource's formal offer, Richard said
contrary to NiSource's claims Columbia is not convinced the merger
would be accretive in the first year. Rather, it believes the
combination would be "substantially dilutive."
"Unless you are quietly planning massive layoffs or rate
increases, we do not believe you will be able to achieve the kind
of synergies you would need for the transaction to be even
marginally accretive, let alone achieve the 10 to 12% annual
earnings per share growth that we are seeking for our company on a
stand alone basis by 2001," he said.
Columbia's board also believes the plan would run into serious
regulatory trouble because of NiSource's plan to borrow $5.7
billion to afford the purchase, creating a "highly leveraged
debt-to-capital ratio of approximately 84% at closing. We also
believe there are significant risks inherent in your plans to
reduce that debt with a $2.6 billion equity offering-which would
be, by far, the largest such offering in the utility industry,"
"It is unfortunate that, in your apparent need to find a
solution for NiSource's vulnerabilities in an increasingly
competitive environment, you are attempting a 1980s-style hostile
takeover of our company," he added. "We agree with you that your
costly and disruptive tender offer and related lawsuits are a waste
of valuable resources-particularly since NiSource has publicly
claimed that the tender offer is little more than a 'no-cost,
no-risk, fully reversible' shareholder referendum."
NiSource took the news in stride, saying it would continue to
"vigorously pursue" its offer. NiSource claims Columbia
shareholders representing 50% of its outstanding shares would like
to see the merger happen. Neale made the case to Columbia's
shareholders recently that compared to 20 other similar deals in
the industry, NiSource's bid stacks up well. The offer is "10.7
times and 15.8 times last twelve months EBITDA and EBIT, comparable
to the mean of 9.5 times and 15 times paid in 20 comparable
transactions completed since April 1996, including Dominion
Resources' acquisition of Consolidated Natural Gas," Neale said.
"Furthermore, NiSource's 35.3% premium to the average closing price
for the four weeks preceding the announcement compares to a 39.5%
average premium for the 20 comparable deals. NiSource is proposing
to pay 23.4 times last 12 months earnings and 2.7 times year-end
book, compared to the mean of 24.2 times and 2.4 times for the
"We believe our offer is fair compared to similar transactions,
and it's worth noting that, looking at the multiples, Columbia's
offer for Consolidated Natural Gas three months ago was similar,"
Neale told shareholders. "Of course, we're willing to pay more, but
we don't want to bid against ourselves. We need to meet Columbia's
team across the table and discuss how we can better our offer," he
Neale noted Richard isn't promising Columbia shareholders a $68
share price "now or in the future. Everything else is a smoke
screen designed to obscure the true value of what is on the table,"
Columbia still has not decided how to prop up its slumping share
price. The 52-week range on Columbia's stock is
$42.88-$64.63/share. Two weeks ago, the company was considering
buying back 10% of its outstanding shares to try to up its share
price higher than $68, but no further details have been announced.
Columbia's share price ended last week at $63.25/share.
NiSource has set a deadline of Aug. 6 for its offer. Even if
NiSource receives tenders for a majority of Columbia's outstanding
shares, it would not be able to purchase more than 4.9% of the
stock unless and until it received state and federal regulatory
approvals, Columbia told its shareholders last week. In addition,
even if NiSource was able to nominate candidates to stand for
election as directors of Columbia's board at Columbia's next annual
meeting, under Columbia certificate of incorporation NiSource would
be unable to gain a majority on Columbia's board prior to 2001.