Columbia Tries to Wrest CNG from Dominion's Grip
The sharp decline in the value of Dominion Resources' proposed
acquisition of Consolidated Natural Gas, prompted Columbia Energy
Group to make public its intentions to break up the transaction
with a competing $6.7 billion bid over the weekend.
In a conference call yesterday detailing the unsolicited offer,
Columbia CEO Oliver G. Richard presented a long list of reasons his
company's bid is far superior to Dominion's. Richard said on Feb.
20, Columbia unsuccessfully tried to convince the CNG board its bid
was the better one. "We are pursuing this transaction on a
negotiated basis and we will withdraw our offer on May 3 if CNG
does not respond to us favorably by then."
Dominion announced its friendly takeover of CNG in February. At
the time, the convergence transaction, which would form the
nation's fourth largest gas and electric utility company with four
million customers, was valued at about $6.3 billion. But since then
it has cascaded down in value to about $5.8 billion. The company
plans to promote the deal in an upcoming road show designed to stem
the sharp drop in value. It also announced a corporate
restructuring yesterday in preparation for the combination and for
electric restructuring in Virginia.
But Columbia's $70/share offer, consisting of $24.50 in shares
of Columbia and $45.50 in cash, represents a 21% premium to
Dominion's stock offer and 25% premium to CNG's market price based
on closing prices yesterday. The transaction also has a "higher
probability of realizing" greater synergies, Columbia officials
said yesterday, predicting about $350 million in annual savings,
one third of which would go to ratepayers.
More than 85% of CNG's customer base is in the same states as
Columbia's, Columbia CFO Michael W. O'Donnell noted. The remaining
CNG customers are in states adjacent to Columbia's operations. The
combined company would have more than 4 million customers. It also
would be by far the largest gas storage operator in the country
with about 750 Bcf of working gas capacity, or 23% of the total
working gas capacity in the United States, according to data from
the American Gas Association. The combined entity would have nine
local distribution companies and would be the seventh largest
independent gas and oil producer in the nation with 2.5 Tcfe of
proved gas reserves. "It would be an excellent financial, strategic
and cultural fit," said Richard.
Not true, said Dominion CEO Thos. E. Capps. "This hostile offer
is an intentional distraction to the creation of America's premiere
and first fully integrated electric power and natural gas company.
Even minimal review shows Columbia's offer is not as attractive to
CNG's shareholders as Dominion's."
Capps said the Columbia offer "contains few growth initiatives,"
would "not be tax-free, unlike our offer, and would be subject to
capital gains tax." CNG shareholders would not benefit from
Dominion's $3.90 dividend. "Columbia will offer the equivalent of
only 40 cents per share." And the balance sheet of the combined
company would be "strained by a more than 60% debt-to-equity
ratio." He said it is hard to believe that earnings would be
accretive in the second year of the Columbia deal, given that
purchase accounting and goodwill amortization would cost the
enterprise $130 million per year after tax, additional interest
expenses would be in excess of $200 million after tax and the
transaction costs would include a penalty payable to Dominion in
excess of $200 million.
Capps also predicted "huge layoffs" and that antitrust laws
might require divestiture of key Columbia and CNG assets.
"Certainly, the proposed buyout will take much longer than
Dominion's to get approved."
Richard admitted the Columbia transaction could take up to 20
months to process through all the regulatory channels, but he said
Columbia expects no major regulatory roadblocks to the deal and no
Ronald J. Barone of PaineWebber said despite the huge amount of
storage, distribution and transportation assets being placed under
one roof through a Columbia-CNG deal he doesn't expect any
regulatory backlash. "No, I don't anticipate any regulatory
problems with this merger. We're talking about regulated open
access operations. Plus they say about one third of the savings
will be going to ratepayers. That's got to make the regulators
Barone said the Columbia offer is far superior to Dominion
Resources' offer. "It's the price, mainly. We had a $68/share
target for any takeover of CNG. [Columbia's offer] is $70 share. If
you look at Dominion's stock price, it's a $60.01/share offer. I've
got to believe for the stockholder's sake you take the Columbia
offer. Columbia also has much greater earnings prospects than
Dominion. I don't follow Dominion, but if you look at First Call,
analysts generally have Dominion at 4% annual growth. We're
expecting 10-11% annual earnings growth for Columbia."
Curt Launer of Donaldson Lufkin & Jenrette also liked the
Columbia bid over Dominion's. "Our initial reaction to this news is
favorable from the standpoint of the poor performance of CNG before
and since it agreed to merge with Dominion Resources in a deal that
values CNG at 1.52 shares of [Dominion stock] or about $60
currently.. Including an expected decline in [Columbia stock price]
of about 10% on this news, in our opinion the [Columbia] bid is
superior to the [Dominion] offer as it currently stands."
Dominion does not plan to sweeten its offer, spokesman Hunter
Applewhite said late yesterday. CNG said it is reviewing the
Columbia offer and will make a decision shortly.
Columbia, based in Herndon, VA, had 1998 revenues of nearly $6.6
billion. CNG had 1998 revenue of $2.76 billion. And Dominion had $6
billion in revenues last year.