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Columbia, Dominion Battle for CNG

April 26, 1999
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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 about $61/share.

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&ampP 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 weeks ago.

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 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.

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 ratio."

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 regulators happy."

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 &amp 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 again.

"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."

Rocco Canonica

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