Columbia, Dominion Battle for CNG
By the close of trading last Friday, Columbia Energy Group's
$6.7 billion unsolicited bid for Consolidated Natural Gas still had
the edge on Dominion Resources' all stock offer worth $5.9 billion,
but Dominion's stock price was gaining ground.
The sharp decline in the value of the Dominion proposal prior to
Columbia's announcement is what prompted Columbia to renew its plan
to break up the Dominion-CNG merger last week. Columbia CEO Oliver
G. Richard said on Feb. 20 his company 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," Richard said last week.
Columbia is offering $70 for each share of CNG stock, consisting
of $24.50 in shares of Columbia stock and $45.50 in cash. That
compares with Dominion's offer of 1.52 shares of its stock (which
closed a $40.25/share on April 23) for each share of CNG stock, or
However, CNG will be weighing more than just the current value
of the two offers in making a decision about its future in the
energy industry. One deal offers the long-term benefits of
significant consolidation of gas distribution, storage,
transmission and E&P operations, but the other offers
opportunities presented by convergence of the gas and electric
industries and is further along in the regulatory process - the
Dominion-CNG merger was filed with state and federal regulators two
In a conference call early last week detailing the Columbia
offer, Richard presented a long list of reasons his company's
consolidation plan is far superior to Dominion's convergence
merger. The Columbia transaction has a higher probability of
realizing greater synergies, he said, predicting about $250 million
in savings in the second year following merger completion and $300
million in annual savings thereafter, with about one third of those
savings going 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. A merger
also would combine the largest (CNG's) and second largest storage
operations in the country, both of which are located in the
Northeast. The combined company would have about 750 Bcf of working
gas storage capacity, or 23% of the total working gas capacity in
the United States, according to data from the American Gas
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.
Dominion announced its friendly takeover of CNG in February and
the two companies have since filed all their applications with
state and federal regulators and have started restructuring their
operations to accommodate the combination. Last week, Dominion
started its road show to promote the merger, which would form the
nation's fourth largest gas and electric utility company with four
million customers. Dominion and CNG already are in the process of
identifying locations along CNG's web-like northeastern pipeline
system for gas-fired power generation plants.
Dominion CEO Thos. E. Capps said Columbia's "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. He said the
Columbia offer "contains few growth initiatives."
It also 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
Capps 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.
He also predicted a Columbia-CNG consolidation would result in
"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 until the
end of 2000 to process through all the regulatory channels, in
contrast to the Dominion-CNG merger which is expected to be
completed by year end. But he said Columbia expects no major
regulatory roadblocks to the deal and no asset divestitures.
Ronald J. Barone, an energy analyst at 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
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
[based on stock prices last Monday]. I've got to believe for the
stockholder's sake you take the Columbia offer.
"Columbia also has much greater earnings prospects than
Dominion," he added. "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 said last week it does not plan to sweeten its offer.
CNG officials said they are reviewing the Columbia bid and will
make a decision shortly. Meanwhile CNG came under legal pressure
last week from several of its shareholders who charged the
company's directors with refusing to fulfill their fiduciary duties
to shareholders by not considering Columbia's offer. CNG spokesman
Dan Donovan said the "lawsuits are without merit" because the
company did review the initial Columbia bid and will review it once
"The bottom line is we still don't know what's going to happen,"
Launer added late last week. "I think Dominion is trading at $39
and a little bit, which is up from where it was before all this
started, indicating that their shareholders might be happier if
Dominion didn't succeed here, which is sort of an interesting
comment." It was somewhat ironic that Dominion's stock price was
rising last week probably because stockholders believed Dominion
might lose out on the deal and avoid the earnings dilution from the
merger, but that rise in Dominion's stock price was making the
existing Dominion deal even more competitive with Columbia's offer.
Columbia's stock was falling last week because Columbia's
"shareholders are saying we think this could be very good for you
longer term but shorter term it's going to take a lot of time to
get it done so maybe we don't want to be around for the ride,"
Launer said. Meanwhile CNG stock "of course is up this week on the
idea that there's another bidder for the company that's willing to
pay a higher valuation.
"Despite the numbers Dominion has quoted to me, I would twist
their words around and say I do consider the Columbia offer right
now to be superior," Launer added, "even with the [exit fee, good
will cost and other charges] Dominion mentioned included. We'll
have to stay tuned."
Both transactions "have merit," said AG Edwards energy analyst
Doug Fisher. "It's just your perspective. It's who's offering you
more value over the long term."