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Black Hills Continues Quest for NorthWestern Despite Initial Rejections

While making public early rejections and a stalemate surrounding confidential agreements, Rapid City, SD-based Black Hills Corp. Friday continued to appeal to NorthWestern Corp.'s board in an effort to kick-start merger talks between the two utility holding companies in South Dakota. In its latest formal letter to the NorthWestern board, Black Hills said it can't be unreasonably constrained from pursuing what it views as a perfect strategic marriage of companies.

What Black Hills characterizes as "inappropriate and inconsistent" insistence by NorthWestern for so-called "stand-still" restrictions on the proposed negotiations lasting for a year's time would be totally out of line and onerous, according to the latest correspondence between the two companies. Black Hills said its financial advisers have confirmed this characterization of the requirements that NorthWestern is trying to place on the talks.

"Given the importance of this transaction for both companies' shareholders and customers, and the response we have thus far received from you, we cannot accept restrictions on our ability to pursue a combination with NorthWestern beyond those that would be reasonably limited in scope and duration," Black Hills' CEO David Emery wrote in a two-page letter that acknowledged NorthWestern's rejection of the offer last month and the company's insistence on a confidentiality agreement that Emery's company views as too restrictive.

"Putting aside this [recent] history, we remain confident that if we are able to agree to reasonable terms of a confidentiality agreement, we could efficiently conduct requisite due diligence and negotiate appropriate definitive documents in the next six to eight weeks," Emery said in the letter directed to the NorthWestern board and its CEO Michael Hanson.

The latest impassioned Black Hills' proposal comes within days of the NorthWestern board giving a verbal stiff arm to its neighboring energy company by broadening its scope beyond the pending offer when the NorthWestern board of directors met last Tuesday to "consider potential strategic alternatives to maximize stockholder value." The company confirmed that the potential $1.25 billion Black Hills offer was among the so-called "alternatives" being examined.

Earlier in the month, a Michigan city pension fund holding shares in NorthWestern filed a lawsuit in a court in South Dakota seeking to make a class action issue out of the company's reluctance so far to accept public- and private-sector offers to buy the billion-dollar utility holding company that emerged from Chapter 11 bankruptcy last year. The City of Livonia Employees' Retirement System filed the suit in a federal court.

In the latest letter, Black Hills stressed the shareholder lawsuit among five reasons why the proposed standstill confidential requirements are not needed. The others are what Black Hills called "the positive public responses" by NorthWestern shareholders to the proposal, commentary from Standard & Poor's Ratings Services, positive public reaction to keeping assets in regionally based companies, and finally, the NorthWestern board's latest actions.

At its Dec. 6 meeting, the NorthWestern board adopted a so-called "stockholders' rights plan" to protect shareholder interests and to allow the board "to review and evaluate its strategic alternatives in an orderly fashion," the company said in a prepared announcement on the board's action.

"The rights plan is similar to plans adopted by many other companies to protect the interests of stockholders by discouraging coercive, unfair or abusive takeover tactics that do not offer fair value to all stockholders and that could impinge on the board's review of strategic alternatives," a Sioux Falls, SD-based NorthWestern spokesperson said.

NorthWestern said that under the rights plan, preferred stock purchase rights will be distributed as dividends at the rate of one right for each share of common stock of the company held by stockholders of record as of the close of business on Dec. 15. The rights expire on Dec. 5, 2015. "The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the NorthWestern stock, or commences or publicly announces a tender or exchange offer upon consummation of which they would beneficially own 15% or more of the common stock," NorthWestern said.

However, in Black Hills' letter Friday, CEO Emery said that his company for "many months" earlier this year had tried unsuccessfully to conduct "confidential and constructive discussions" regarding a merger before he and NorthWestern's Hanson discussed the proposal Nov. 1, and committed to reviewing it with the NorthWestern board a week later (Nov. 8), concluding Nov. 16 when Hanson reported that the board rejected entering into merger negotiations.

Black Hills made its offer just before the Thanksgiving holiday last month but only publicly acknowledged it after NorthWestern announced its board would review the offer. Black Hills emphasized the stock-for-stock merger proposal was only an "offer" that awaited the NorthWestern board's decision as whether to pursue a marriage through future negotiations.

Emery has stressed publicly that coming out of a completed Chapter 11 bankruptcy a year ago, NorthWestern is strong on the regulated utility side, an area where Black Hills wants to put more emphasis. On the other hand, Black Hills sees its current strengths in the wholesale generation and management of fuel assets where it holds coal, oil and natural gas reserves.

In the wake of the shareholder lawsuit, NorthWestern would not comment, although the company was busy last Wednesday notifying utility customers and regulators about its response to a severe ice storm in the past week that wreaked havoc with its utility operations in South Dakota. In addition, the company on Tuesday announced it had sold power generation equipment for $20 million to Navasota Holdings Texas Partners LP and the deal will close in the first quarter next year.

While a still-pending offer from a coalition of cities in Montana has been rejected by NorthWestern's board, the directors and company are now reviewing a subsequent offer from neighboring South Dakota-based Black Hills. However, in establishing a shareholder protection plan in the event of hostile takeover moves, the NorthWestern board earlier in the week did not set a timetable for responding to Black Hills.

Missoula's mayor, Mike Kadas, leader of the municipal move to buy NorthWestern and make a public sector utility out of it, told local news media that the pension fund obviously views the municipal offer as "pretty good" and is taking it seriously. The cities have offered $32.50/share for NorthWestern, along with assuming $1 billion of the company's debt. NorthWestern's board rejected the offer and has refused to allow the cities to conduct a full examination of the company's financial records.

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