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Columbia Tells NiSource To Hit the Road, Again

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 soon.

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 compelling."

"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 energy market."

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," Richard said.

"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 comparable deals.

"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 said.

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," he said.

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.

Rocco Canonica

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