Outlook Remains Cloudy for NiSource, Columbia
Despite finally convincing Columbia Energy Group to completely
reverse its position and sell-out for about $72/share, $2/share
less than the previous tender offer, NiSource Inc. still faces a
steep uphill battle to get the transaction approved by shareholders
and regulators, and to finance the deal, according to investment
"It's not going to be a walk in the park," said PaineWebber's
Ronald J. Barone. "Their stock is killed; they can't sell stock [to
finance it]. They're just going to have to do it through asset
sales and debt initially." In its prior offer for Columbia,
NiSource planned to issue $2.6 billion in equity, the largest ever
by a U.S. utility, to retire part of the $6 billion loan it plans
to get from Credit Suisse First Boston and Barclays Bank. That's no
longer a viable option, however.
Barone said he was surprised during the first part of the
conference call on the transaction last week to hear NiSource
officials saying they had not planned any asset sales to cover the
cash portion of the deal or to pay off the debt. "Then a little bit
later in the call it came out that there were going to be asset
sales," potentially as much as $1.5 billion in assets sales.
The company also sent out mixed signals regarding the amount of
earnings dilution expected from the transaction, whether Columbia
executives were going to be offered positions in the new company or
on its board, if there were going to be any layoffs and if so where
they would take place.
One observer said, "Stuff like that makes you wonder about
credibility. I just felt there wasn't a true, open, full
discussion. I think stuff just tripped out. Are they just glancing
over things or what? They are very vague on the assets sales."
The immediate cause for concern, however, is the collapse of
NiSource's stock price. Following the merger announcement last
Monday, in which NiSource said it will take on about $2.5 billion
in Columbia debt in addition to paying out $6 billion in cash and
stock, NiSource shares crashed to a six-year low of less than
$13/share, a 16.5% drop from the day prior. Its shares remained
near $13/share throughout the rest of the week. It's stock had
traded above $30/share in fall of 1998.
"This will be a very close one to watch given that NiSource's
stock price has done so poorly," said Edward Jones analyst Robin
Diedrich. "I think they have tightened up the terms enough so that
it looks like it will get done one way or another. Even if
NiSource's shareholders do not approve the deal, they can take away
stock options and then go forward. If you look at the fact that
60-70% of Columbia's shares already were tendered to NiSource, I
don't think you have to worry about Columbia shareholders [buying
The agreement calls for Columbia shareholders to receive
$70/share in cash plus a $2.60 face value SAILS(SM) (a unit
consisting of a zero coupon debt security with a four-year forward
equity contract). Columbia shareholders also have the option to
receive new holding company stock in a tax-free exchange, for up to
30% of the outstanding Columbia shares. Under the common stock
option, each Columbia share will be exchanged for $74 in new
holding company stock subject to a collar. If the average NiSource
share price during the 30 days prior to closing of the transaction
is $16.50 or below, Columbia shareholders will receive 4.4848
shares of new holding company stock for each Columbia share.
If NiSource shareholder approval is not obtained, the
transaction will automatically be restructured so that Columbia
shareholders will receive $70 in cash plus a $3.02 face-value SAILS
unit of NiSource with no option for Columbia shareholders to elect
new holding company stock.
Responding to a question from a reporter during the conference
call regarding the contingency set up in case NiSource shareholders
reject the deal, NiSource CEO Gary Neale said the company didn't
put that option in place expecting shareholder rejection. "We think
we have good support from our shareholders. That was the Columbia
board just wanting to be conservative to make sure that they didn't
have a deal that could unwrap."
The transaction requires approval by shareholders, as well as
regulators in five states and the federal government before
NiSource can even begin attempting to cross the significant
financial hurdles ahead.
If NiSource's shareholders did reject the transaction, Neale
said, it wouldn't mean they were against it entirely. "If they
voted against it, our shareholders [would be saying] really that
they don't want any equity issued at this time --- 'do it with
debt.' I don't think they would be saying they don't want the deal
Neale also said he expected no regulatory trouble because the
assets of the two companies do not overlap. He noted the Federal
Trade Commission raised no objection to a previously proposed
NiSource transaction with Columbia.
NiSource has obtained a commitment from Credit Suisse First
Boston and Barclays Bank Plc for a bank facility in an amount
sufficient to finance the cash portion of the purchase price.
In addition, Neale said NiSource has identified about $150
million in costs savings from eliminating duplicative corporate,
administrative and purchasing functions.
But Neale waffled on the earnings impact. At first he said the
transaction would dilute earnings by 10 cents/share in 2001. Then
on Thursday PaineWebber's Barone said NiSource had revised that to
13 cents/share dilution.
The long-term picture apparently is somewhat brighter. NiSource
expects a 10-cents/share increase in earnings in 2002 and double
digit earnings growth annually thereafter.
"I think it will probably be successfully completed," said
Barone. "I would think probably late this year. It will be a
formidable competitor. But near-term the stock is going to suffer
because, number one and probably foremost, its' dilutive in the
first year.. "[Investors] aren't going to look ahead and say 'oh
it's good for 2002, and therefore I'm going to buy it today.' The
market is too myopic for that."
Merrill Lynch energy analyst Donato Eassey attributed some of
NiSource's current stock problems to the quirkiness of investors.
"While I like it, the market clearly doesn't in NiSource's case,
but I think that will change over time," he said. "First of all,
[the market] likes anything with a dot com associated with it.
That's what the market is infatuated with. These kinds of
transactions also are usually good for the acquiree, but not the
acquirer near term. The combination of those things is hurting
them, but over time I think rational investors will prevail. If you
look at the multiple that it is currently trading at, it's
ridiculous, ridiculously cheap.
"Every acquirer's stock takes it on the chin initially. Look at
Dominion Resources [which bought Consolidated Natural Gas for $6.4
billion at the beginning of the year]. See how well it performed
over time after the deal?"
Columbia Reverses Course
Meanwhile, observers also were surprised to see Columbia doing what it spent
that last eight months saying it would never do. After NiSource raised its
tender offer last October to $74/share from $68/share, Columbia initiated
a review process during which it brought in other potential suitors to in
effect test the market for its assets and see if it could get a better price
(see NGI, Oct. 25).
Following the review, its long-standing and frequent refrain of
"wrong price wrong time, wrong company" underwent a surprising
reversal to the more upbeat tune of "right price, right time, right
company." Columbia gave in to NiSource's demands and somehow ended
up accepting an even lower price than the one it rejected only a
few months earlier.
"Our board of directors and senior management fully support this
transaction, which we have determined is in the best interest of
Columbia and its shareholders," said Richard. "The board reached
this conclusion after a comprehensive evaluation of strategic
alternatives to generate value greater than that which Columbia's
business plan could create. We believe this merger with NiSource
not only meets our objective of delivering superior value to
Columbia's shareholders, but provides an opportunity for our
shareholders and employees to participate in the growth of the
Energy analyst Curt Launer of Donaldson Lufkin and Jenrette
said, "The good news is that there is a transaction being done
after this long wait. The bad news is to some degree that the
overall decline in the market over the past six to eight weeks,
including the dramatic decline in most utility stocks, which are
trading at 52-week lows, really is what took away Columbia's
opportunity to get the kind of value we once thought that they were
worth." He values the transaction at $71.75/share based on the
present value of the SAILS.
"There wasn't anything to go on at the end of the day for
Columbia to achieve the higher valuation, and they were left to do
the right thing by selling out to NiSource." Launer said the other
companies who were "in the mix" included FirstEnergy, Southern
Company and Constellation Energy among others.
Columbia spokesman Al Rankin said negotiations involved "more
than a dozen" U.S. and foreign companies. "The board's decision in
October that NiSource's $74/share offer was inadequate was based on
information available at that time including written opinions from
two investment banks...," Rankin noted. "Since that time the
Standard & Poors electric index has declined 12-14% while
interest rates have climbed significantly. Also as a result of the
company's evaluation of its alternatives we got a lot of new
information about the competitive landscape in this rapidly
consolidating energy industry and therefore the board reached the
conclusion that the revised offer was in the best interests of the
Too Much Bad Blood
For many observers, it still seems amazing that two companies who waged such
dirty public relations campaigns against each other could bury the hatchet
and come to terms. There were multiple lawsuits on both sides. Columbia took
out full-page ads criticizing NiSource's environmental and rate records, and
then warned its own ratepayers of the potential for price increases and restrictions
on customer choice if NiSource was successful (see NGI, July
"What was said in the heat of battle is now behind us," said
Rankin. "Both Rick Richard and Gary Neale have expressed a desire
to work together in a collegial, professional manner to make sure
the integration of the two companies is as rapid and seamless as
It doesn't appear, however, that Neale and Richard will be
working together for very long. In its prior offer, NiSource was
planning to give Columbia's five top managers, including Richard,
seats on an expanded NiSource board. Richard was even offered a
"According to the information we got today, there's not going to
be any Columbia representation on the board or in a major
management position after the close," said analyst Robin Diedrich.
Although Neale assured observers that Columbia management would
be given opportunities in the new company, he said it has not been
determined which positions will be available. "There are no formal
offers of positions for either [Columbia's] directors or for [Rick
Richard], but we are taking all of that under advisement. We have
the freedom to do anything we want."
"There was just too much bad blood between Richard and
NiSource's management," said Deutsche Bank Alex. Brown analyst Ed
Tirello also said Columbia "got a tad too greedy" in turning
down NiSource's sweetened $74/share bid with its special management
NiSource apparently does intend to keep lower management
personnel onboard from Columbia's operating units. "Our success at
building our business at NiSource has always been predicated upon
fully utilizing the skills and experience of the management team
and employees present within the company with which we have
merged," Neale said. "We're very encouraged by the similarity of
our corporate cultures. We've been impressed by the quality of
Columbia's management team. We anticipate retaining key management
personnel for each of the critical operating units and maintaining
headquarters in their current locations."
Largest Gas Company East of the Rockies
With assets stretching from the Gulf of Mexico, through the
Midwest to the Northeast, the combined company will have a powerful
platform, with access to 30% of the U.S. population and 40% of U.S.
energy consumption. The company will have over 4.1 million gas,
electric, water and propane customers located primarily in nine
states. It will be the largest gas company east of the Rockies
based on customers. It will have the nation's second largest volume
of gas sales with 911 MMcf/d, and it will have the most gas storage
with 700 Bcf of capacity. Based upon the closing market price for
NiSource on Feb. 25, the combined company would have an enterprise
value of $13.7 billion.
"This combination creates the leading gas competitor within the
key energy corridor between the Gulf Coast and the Northeast," said
Neale. "It will be a super-regional energy company with
complementary market areas and no asset overlap. Scale and
geography are critical to success in the evolving competitive
energy industry, and we will have the size and scope necessary to
compete and win."
Merrill Lynch's Donato Eassey said the new energy companies have
to be of "size, scope and scale to compete in this ever-increasing
utility world going forward. While there are some challenges near
term, I think the long-term prospects of such a combination are
very formidable in terms of the number of customers that they will
have, their storage position and their ability to arbitrage off