After extending its unsolicited merger offer for ConsolidatedNatural Gas twice, Columbia Energy finally accepted defeat lastweek, ending a three-month battle with Dominion Resources for CNG’shand. Columbia officially withdrew its $6.7 billion offer lastTuesday following a sweetened merger bid by Virginia Power parentDominion set at $6.4 billion and the CNG board’s unanimous approvalof a revised agreement with Dominion.

“We want to put to rest any further speculation about Columbia’sintentions toward CNG,” said Columbia CEO Oliver G. Richard III.”We had a superior offer and are disappointed in the CNG board’sdecision, but observe that our proposal resulted in CNG’sshareholders gaining a better offer from Dominion than that agreedto by CNG and Dominion in February.”

Despite the failed bid, Columbia vowed to continue growing itsregulated business and its unregulated energy services andmarketing arm, and it plans to renew its search for a mergerpartner or a major acquisition that will keep it among the leadingenergy companies.

“As our interest in CNG has demonstrated, obviously we are opento attractive opportunities brought about by consolidation andconvergence in the energy industry,” Richard said. “We have alsodemonstrated that we are disciplined in our approach, and will onlyconsider those transactions that provide real value for ourshareholders, customers and employees. We will continue to look atadvantageous situations that fit our growth strategies andfinancial criteria.”

“It was a foregone conclusion early on that Dominion would winthis one,” according to Paul Messerschmidt with Energy SecurityAnalysis (ESAI). “The Columbia offer came too late in the game andit was really not as attractive because of the timing and theregulatory hurdles. I find it intriguing that when Dominion wasurged to raise its bid, it held firm for the most part. It wasconfident it had the better offer.”

In the end, Columbia’s consolidation merger plan, which wouldhave created one of the largest gas utilities and independentproducers in the nation, was deemed inferior to Dominion’selectric-gas convergence transaction.

Dominion’s revised offer was a clear improvement compared to itsprevious all-stock bid to convert each common share of CNG to 1.52shares of Dominion stock. In February, the Dominion offer valuedCNG at about $6 billion, but it fell shortly thereafter to $5.8billion. The revised Dominion bid is $66.60/share ($6.4 billion),guaranteeing a greater portion in cash to cover any fluctuation inthe value of the stock portion of its offer.

“For the CNG shareholder, this provides fair value with pricecertainty,” said Dominion CEO Thos. E. Capps. “For the DominionResources shareholder, our new structure will accelerate earningsaccretion, improve free cash flows and increase net income. Becausewe will purchase CNG through a combination of cash and shares, wewill issue fewer shares, thereby reducing earnings dilution. And itwill reduce the cash requirement needed to sustain our $2.58 annualdividend rate. The cash component will be raised through acombination of borrowing and the issuance of preferred stock.”

Capps also said, as part of this revised structure, up to 20% ofDominion’s outstanding shares would be repurchased at $43 pershare, which is a 5% premium over their closing price on May 10. Asa result of the Dominion cash election plus additional stockrepurchases, the pro forma acquisition capital structure would be30% common stock and 70% debt and preferred securities.

At face value, the revised Dominion offer still falls short ofColumbia’s by about $300 million, excluding consideration ofDominion’s $2.58 per share dividend and the tax-free nature of itsoffer. Some analysts, including PaineWebber’s Ronald J. Barone,still see the Columbia proposal as superior from “both an economicand a strategic standpoint. The combination of CNG and Columbiawould truly represent and ideal fit,” Barone said in a report lastweek.

CNG’s board, however, clearly disagreed. “We believe that acombination of CNG and Dominion best serves our shareholdersbecause it makes strategic sense and has a straightforward road mapto completion,” said Chairman George A. Davidson, Jr. “Together, wewill have the scale, scope and skills to be successful in thecompetitive energy marketplace.”

CNG’s board concluded the revised Dominion transaction wasbetter for CNG shareholders due to its certainty and timing, thestrategic benefits of a gas and electric combination, and theupside potential to shareholders of an investment in the combinedCNG/Dominion.

The board said it based its decision in part on a review of theregulatory situation and on input from several regulatory experts,including former public utility commissioners. CNG and Dominionlargely had completed all of their regulatory filings for themerger even before Columbia’s April bid. A Hart-Scott-Rodino filingwith the SEC was made on May 10, a FERC filing is expected shortlyand the transaction is expected to close, at the latest, in early2000. In contrast, a Columbia merger was expected to take muchlonger, possibly until year end 2000.

CNG and Dominion will have an energy portfolio of more than20,000 MW of power generation, and nearly 3 Tcfe of gas and oilreserves with production exceeding 300 Bcf annually. They willoperate a major interstate gas pipeline, the largest gas storagesystem in North America and will rank as one of the largestindependent producers. They will form one of the nation’s largestintegrated energy companies, serving nearly 4 million retailcustomers in five states. Market capitalization of the combinedentity will be $25 billion-consisting of approximately $14.4billion in equity, $9.5 billion in debt and minority interests, and$1.1 billion in preferred stock.

Rocco Canonica

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