Columbia Says its Rejection is Final; NiSource 'Undeterred'

As many analysts and observers expected, Columbia Energy Group's board swiftly rejected NiSource's $5.7 billion, $68/share, purchase offer last week on the advice of management, legal counsel and a financial team at Salomon Smith Barney. But NiSource officials said they were "undeterred" by the decision and would move forward on discussions with Columbia's shareholders.

It took Columbia's board only four days to make a final decision to reject the offer and conclude its initial impressions of the deal were accurate: that the purchase would "deprive" Columbia shareholders of the long-term growth expected from the company's existing strategic plan.

"We can't believe that our offer received a thorough review in the short period since making it public on Monday," NiSource Chairman Gary L. Neale responded late Thursday. "Columbia's announcement does not mean that we are going away. We're determined to complete this transaction, which we believe creates value for both companies' shareholders."

Neale said last week his company met with shareholders representing 35% of Columbia's outstanding shares. They were "vocal in support of our offer. We believe they will not accept the dismissive tone of Columbia's response and will continue to express their support for our position that it is time to negotiate with NiSource."

In a letter detailing the decision for Neale, Columbia CEO Oliver G. (Rick) Richard III said "Our decision not to pursue your proposal is final." Richard seemed astounded that a company whose performance has paled in comparison to Columbia's would have the nerve to expect Columbia management to embrace such a minimal offer and become prey to a smaller company. It would be a sharp role reversal for Columbia, which just last month lost in a bidding war with Dominion Resources for the purchase of Consolidated Natural Gas.

Richard noted that since he joined Columbia in 1995 "our total rate of return has outperformed the S&P 500 and the S&P Natural Gas Index and has been approximately double that of your company.

"The [board] believes Columbia's stock does not fully reflect our true earnings potential. This only strengthens our resolve to prevent another company from taking advantage of this current anomaly and reaping for itself the significant values inherent in our strategic plan," he said. That plan, he added, includes "driving earnings growth in transmission and distribution segments through both new business opportunities and continued cost reduction, redeploying cash in higher return nonregulated business segments and building on Columbia's established positions to prosper in the emerging deregulated energy industry."

Richard also told Neale that a number of NiSource public statements, including its expectations for the regulatory timing and potential benefits of its strategy for a combined company, "simply are not realistic."

NiSource claims regulatory approval could be completed by the end of the year and said it based that expectation on the analysis of two other merging companies, Dominion Resources and Consolidated Natural Gas, regarding their own merger process, which will include review by the same state and federal regulatory bodies.

NiSource's strategy is to create a "natural gas distribution corridor" between Chicago and New England and between the Gulf Coast region and the Northeast. NiSource closed on a $780 million acquisition of Massachusetts-based Bay State Gas Co. in February and in April completed a $150 million purchase of TPC Corp., which owns a network of high-deliverability salt cavern storage facilities in the eastern U.S.

"This combination will create a super-regional powerhouse capable of earnings growth in excess of 12% per year primarily from our core businesses," said Neale in reference to the Columbia transaction. "For Columbia's shareholders, the offer represents full and fair value in a six- to nine-month time frame with little regulatory risk. For NiSource's shareholders, this transaction is accretive in the first 12 months with minimal synergies required." Neale predicted there would be no layoffs from core operational groups.

NiSource's $5.7 billion, $68/share bid is a 31% premium over a 20-day average of Columbia's share price as of June 4 and a premium to Columbia's all-time high stock price. NiSource also would assume about $2.25 billion in Columbia debt.

The combination would more than double the size of Merrillville, IN-based NiSource, creating a company with a market capitalization of $8.3 billion. It would be one of the largest energy distribution companies in the country with nearly 4 million electric, gas and propane distribution customers, 19,000 miles of pipelines connecting the Texas Gulf Coast and the Atlantic coast, 700 Bcf of total storage capacity, and 800 Bcf of gas reserves.

Merrill Lynch energy analyst Donato Eassey said last week he likes the strategy behind the transaction. "I love geographic diversification. I think the management of [NiSource] has done a very good job at accumulating assets that are going to add value. You have to have as critical a mass size as you can get in order to be competitive in the energy world today."

But Eassey and several other analysts concluded the price offered was far too low. "It's a decent offer. But I think Columbia will go for a higher number if they go at all," he said. "The fact of the matter is $68/share is a good number but $73 is probably the right number in terms of what the company is worth as we speak." Eassey said fundamentally Columbia's stock is worth close to $70 on 2000 earnings forecasts. "There are people suggesting it's worth as much as $82/share. I'm not there."

NiSource likely will have to increase its bid, and it does seem willing to do so "if its reasonable," Eassey added. "They're trying to buy it cheap still. This is the bottom of the first inning."

Donaldson, Lufkin & Jenrette energy analyst Curt Launer also said the offer would be "too low to be successful." Launer estimated the NiSource bid to be 16.2 times Columbia's 2000 earnings per share, eight times 2000 cash flow, 7.7 times 2000 EBITDA and 2.7 times Columbia's book value. "Our analysis shows all of these multiples to be below the ranges shown by recent deals, providing an opportunity for others to consider entering the bidding for CG, and/or NI to increase its bid."

Although many observers were expecting the offer to immediately trigger other bids, none had been made as of Friday. "..I've got a funny feeling this opens the door to a bunch more bids," said BT Alex. Brown energy analyst Ed Tirello. "Every big electric company is looking, all the guys with cash. I mean you have First Energy, GPU. You've got Unicom, Cinergy. It probably will be one of the guys right there in the neighborhood. They're all flushed with cash.

"I'd bet that every investment banker that wasn't in the deal is now trying to get somebody to come into do the deal," Tirello added. "You've got management looking around for a white knight. They don't want to do the [NiSource] deal because they want to stay in the business or they want to own someone else; it's a natural reaction. This is the beginning of the story, not the end."

Rocco Canonica

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