The sharp decline in the value of Dominion Resources’ proposedacquisition of Consolidated Natural Gas, prompted Columbia EnergyGroup to make public its intentions to break up the transactionwith 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 hiscompany’s bid is far superior to Dominion’s. Richard said on Feb.20, Columbia unsuccessfully tried to convince the CNG board its bidwas the better one. “We are pursuing this transaction on anegotiated basis and we will withdraw our offer on May 3 if CNGdoes not respond to us favorably by then.”

Dominion announced its friendly takeover of CNG in February. Atthe time, the convergence transaction, which would form thenation’s fourth largest gas and electric utility company with fourmillion customers, was valued at about $6.3 billion. But since thenit has cascaded down in value to about $5.8 billion. The companyplans to promote the deal in an upcoming road show designed to stemthe sharp drop in value. It also announced a corporaterestructuring yesterday in preparation for the combination and forelectric restructuring in Virginia.

But Columbia’s $70/share offer, consisting of $24.50 in sharesof Columbia and $45.50 in cash, represents a 21% premium toDominion’s stock offer and 25% premium to CNG’s market price basedon closing prices yesterday. The transaction also has a “higherprobability of realizing” greater synergies, Columbia officialssaid 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 asColumbia’s, Columbia CFO Michael W. O’Donnell noted. The remainingCNG customers are in states adjacent to Columbia’s operations. Thecombined company would have more than 4 million customers. It alsowould be by far the largest gas storage operator in the countrywith about 750 Bcf of working gas capacity, or 23% of the totalworking gas capacity in the United States, according to data fromthe American Gas Association. The combined entity would have ninelocal distribution companies and would be the seventh largestindependent gas and oil producer in the nation with 2.5 Tcfe ofproved gas reserves. “It would be an excellent financial, strategicand cultural fit,” said Richard.

Not true, said Dominion CEO Thos. E. Capps. “This hostile offeris an intentional distraction to the creation of America’s premiereand first fully integrated electric power and natural gas company.Even minimal review shows Columbia’s offer is not as attractive toCNG’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 tocapital gains tax.” CNG shareholders would not benefit fromDominion’s $3.90 dividend. “Columbia will offer the equivalent ofonly 40 cents per share.” And the balance sheet of the combinedcompany would be “strained by a more than 60% debt-to-equityratio.” He said it is hard to believe that earnings would beaccretive in the second year of the Columbia deal, given thatpurchase accounting and goodwill amortization would cost theenterprise $130 million per year after tax, additional interestexpenses would be in excess of $200 million after tax and thetransaction costs would include a penalty payable to Dominion inexcess of $200 million.

Capps also predicted “huge layoffs” and that antitrust lawsmight require divestiture of key Columbia and CNG assets.”Certainly, the proposed buyout will take much longer thanDominion’s to get approved.”

Richard admitted the Columbia transaction could take up to 20months to process through all the regulatory channels, but he saidColumbia expects no major regulatory roadblocks to the deal and noasset divestitures.

Ronald J. Barone of PaineWebber said despite the huge amount ofstorage, distribution and transportation assets being placed underone roof through a Columbia-CNG deal he doesn’t expect anyregulatory backlash. “No, I don’t anticipate any regulatoryproblems with this merger. We’re talking about regulated openaccess operations. Plus they say about one third of the savingswill be going to ratepayers. That’s got to make the regulatorshappy.”

Barone said the Columbia offer is far superior to DominionResources’ offer. “It’s the price, mainly. We had a $68/sharetarget for any takeover of CNG. [Columbia’s offer] is $70 share. Ifyou look at Dominion’s stock price, it’s a $60.01/share offer. I’vegot to believe for the stockholder’s sake you take the Columbiaoffer. Columbia also has much greater earnings prospects thanDominion. I don’t follow Dominion, but if you look at First Call,analysts generally have Dominion at 4% annual growth. We’reexpecting 10-11% annual earnings growth for Columbia.”

Curt Launer of Donaldson Lufkin & Jenrette also liked theColumbia bid over Dominion’s. “Our initial reaction to this news isfavorable from the standpoint of the poor performance of CNG beforeand since it agreed to merge with Dominion Resources in a deal thatvalues CNG at 1.52 shares of [Dominion stock] or about $60currently.. Including an expected decline in [Columbia stock price]of about 10% on this news, in our opinion the [Columbia] bid issuperior to the [Dominion] offer as it currently stands.”

Dominion does not plan to sweeten its offer, spokesman HunterApplewhite said late yesterday. CNG said it is reviewing theColumbia offer and will make a decision shortly.

Columbia, based in Herndon, VA, had 1998 revenues of nearly $6.6billion. CNG had 1998 revenue of $2.76 billion. And Dominion had $6billion in revenues last year.

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