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Columbia Accepts Defeat After Dominion Ups Ante for CNG

Columbia Accepts Defeat After Dominion Ups Ante for CNG

After extending its unsolicited merger offer for Consolidated Natural Gas twice, Columbia Energy finally accepted defeat last week, ending a three-month battle with Dominion Resources for CNG's hand. Columbia officially withdrew its $6.7 billion offer last Tuesday following a sweetened merger bid by Virginia Power parent Dominion set at $6.4 billion and the CNG board's unanimous approval of a revised agreement with Dominion.

"We want to put to rest any further speculation about Columbia's intentions toward CNG," said Columbia CEO Oliver G. Richard III. "We had a superior offer and are disappointed in the CNG board's decision, but observe that our proposal resulted in CNG's shareholders gaining a better offer from Dominion than that agreed to by CNG and Dominion in February."

Despite the failed bid, Columbia vowed to continue growing its regulated business and its unregulated energy services and marketing arm, and it plans to renew its search for a merger partner or a major acquisition that will keep it among the leading energy companies.

"As our interest in CNG has demonstrated, obviously we are open to attractive opportunities brought about by consolidation and convergence in the energy industry," Richard said. "We have also demonstrated that we are disciplined in our approach, and will only consider those transactions that provide real value for our shareholders, customers and employees. We will continue to look at advantageous situations that fit our growth strategies and financial criteria."

"It was a foregone conclusion early on that Dominion would win this one," according to Paul Messerschmidt with Energy Security Analysis (ESAI). "The Columbia offer came too late in the game and it was really not as attractive because of the timing and the regulatory hurdles. I find it intriguing that when Dominion was urged to raise its bid, it held firm for the most part. It was confident it had the better offer."

In the end, Columbia's consolidation merger plan, which would have created one of the largest gas utilities and independent producers in the nation, was deemed inferior to Dominion's electric-gas convergence transaction.

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

"For the CNG shareholder, this provides fair value with price certainty," said Dominion CEO Thos. E. Capps. "For the Dominion Resources shareholder, our new structure will accelerate earnings accretion, improve free cash flows and increase net income. Because we will purchase CNG through a combination of cash and shares, we will issue fewer shares, thereby reducing earnings dilution. And it will reduce the cash requirement needed to sustain our $2.58 annual dividend rate. The cash component will be raised through a combination of borrowing and the issuance of preferred stock."

Capps also said, as part of this revised structure, up to 20% of Dominion's outstanding shares would be repurchased at $43 per share, which is a 5% premium over their closing price on May 10. As a result of the Dominion cash election plus additional stock repurchases, the pro forma acquisition capital structure would be 30% common stock and 70% debt and preferred securities.

At face value, the revised Dominion offer still falls short of Columbia's by about $300 million, excluding consideration of Dominion's $2.58 per share dividend and the tax-free nature of its offer. Some analysts, including PaineWebber's Ronald J. Barone, still see the Columbia proposal as superior from "both an economic and a strategic standpoint. The combination of CNG and Columbia would truly represent and ideal fit," Barone said in a report last week.

CNG's board, however, clearly disagreed. "We believe that a combination of CNG and Dominion best serves our shareholders because it makes strategic sense and has a straightforward road map to completion," said Chairman George A. Davidson, Jr. "Together, we will have the scale, scope and skills to be successful in the competitive energy marketplace."

CNG's board concluded the revised Dominion transaction was better for CNG shareholders due to its certainty and timing, the strategic benefits of a gas and electric combination, and the upside potential to shareholders of an investment in the combined CNG/Dominion.

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

CNG and Dominion will have an energy portfolio of more than 20,000 MW of power generation, and nearly 3 Tcfe of gas and oil reserves with production exceeding 300 Bcf annually. They will operate a major interstate gas pipeline, the largest gas storage system in North America and will rank as one of the largest independent producers. They will form one of the nation's largest integrated energy companies, serving nearly 4 million retail customers in five states. Market capitalization of the combined entity will be $25 billion-consisting of approximately $14.4 billion in equity, $9.5 billion in debt and minority interests, and $1.1 billion in preferred stock.

Rocco Canonica

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ISSN © 2577-9877 | ISSN © 1532-1266
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