Columbia Energy Group’s eight-month refrain of “wrong price,wrong time, wrong company,” referring to NiSource’s hostile tenderoffer, was unexpectedly altered yesterday to the more upbeat tuneof right price, right time, right company. However, Columbia CEOOliver G. Richard III won’t be playing the lead fiddle much longer.

Columbia’s board approved a $6 billion friendly takeover byNiSource, including resumption of $2.5 billion in Columbialong-term debt.

“Our board of directors and senior management fully support thistransaction, which we have determined is in the best interest ofColumbia and its shareholders,” said Richard. “The board reachedthis conclusion after a comprehensive evaluation of strategicalternatives to generate value greater than that which Columbia’sbusiness plan could create. We believe this merger with NiSourcenot only meets our objective of delivering superior value toColumbia’s shareholders, but provides an opportunity for ourshareholders and employees to participate in the growth of thecombined entity.”

The agreement calls for Columbia shareholders to receive$70/share in cash plus a $2.60 face value SAILS(SM) (a unitconsisting of a zero coupon debt security with a four-year forwardequity contract). Columbia shareholders also have the option toreceive new holding company stock in a tax-free exchange, for up to30% of the outstanding Columbia shares. Under the common stockoption, each Columbia share will be exchanged for $74 in newholding company stock subject to a collar. If the average NiSourceshare price during the 30 days prior to closing of the transactionis $16.50 or below, Columbia shareholders will receive 4.4848shares of new holding company stock for each Columbia share.

It was a strange turn of events yesterday given that Columbiafought so hard to prevent a transaction and then turned around toaccept a deal at a lower value than the original — one thatapparently excludes Columbia’s top management.

Edward Jones equity analyst Robin Diedrich said, “According tothe information we got today, there’s not going to be any Columbiarepresentation on the board or in a major management position afterthe close.”

Although NiSource CEO Gary Neale assured observers yesterdaythat Columbia management would be given opportunities in the newcompany, he said it has not been determined which positions will beavailable. In its prior offer, NiSource was planning to giveColumbia’s five top managers, including Richard, seats on anexpanded NiSource board. Richard was even offered a vicechairmanship. That deal apparently is now off the table.

“There was just too much bad blood between Richard and NiSourcemanagement,” said Deutsche Bank Alex. Brown analyst Ed Tirello. Healso said Columbia “got a tad too greedy” in turning downNiSource’s sweetened $74/share bid with the special managementincentives.

Curt Launer of Donaldson Lufkin and Jenrette values thetransaction at $71.75/share based on the present value of theSAILS. “The good news is that there is a transaction being doneafter this long wait. The bad news is to some degree that theoverall decline in the market over the past six to eight weeks,including the dramatic decline in most utility stocks, which aretrading at 52-week lows, really is what took away Columbia’sopportunity to get the kind of value we once thought that they wereworth.”

Launer and many other equity analysts previously said Columbiawas worth between $75 and $80/share perhaps even more. “You arelooking at a transaction that’s a little bit more than $70/share[down $4 from NiSource’s prior offer]. Columbia did have otherbidders in there, but if you think about any of those bidderstrying to use their share prices as currency and you look at allthe utility names that have been in the mix, just about everysingle one of them is trading at a new 52-week low,” Launer noted.”So there wasn’t anything to go on at the end of the day forColumbia to achieve the higher valuation, and they were left to dothe right thing by selling out to NiSource.” Launer said the othercompanies who were “in the mix” included FirstEnergy, SouthernCompany and Constellation Energy.

Upon completion of the transaction, Columbia Energy Group andNiSource will become wholly owned subsidiaries of a new holdingcompany. The transaction will be accounted for as a purchase and isexpected to be dilutive to NiSource’s earnings per share in thefirst year after the close of the combination primarily due totransaction costs and other one-time charges. Neale said despitethe significant financial hurdles required to complete the deal heexpects it to be accretive in the second year with 10 cents/shareearning growth expected in 2002 and continued double-digit earningsgrowth going forward.

Neale projects cost savings of $100-150 million from eliminatingduplicate corporate, administrative and purchasing operations butexcluding synergies from combined assets and operations. Theseparate companies’ corporate headquarters — NiSource inMerrillville, IN, and Columbia in Herndon, VA — are expected tobe retained. NiSource said the deal should be completed before theend of the year.

“This combination creates the leading gas competitor within thekey energy corridor between the Gulf Coast and the Northeast,” saidNeale. “It will be a super-regional energy company withcomplementary market areas and no asset overlap. Scale andgeography are critical to success in the evolving competitiveenergy industry, and we will have the size and scope necessary tocompete and win.”

With assets stretching from the Gulf of Mexico, through theMidwest to the Northeast, the combined company will have a powerfulplatform, with access to 30% of the U.S. population and 40% of U.S.energy consumption. The company will have over 4.1 million gas,electric, water and propane customers located primarily in ninestates. It will be the largest gas company east of the Rockiesbased on customers. It will have the nation’s second largest volumeof gas sales with 911 MMcf/d, and it will have the most gas storagewith 700 Bcf of capacity. Based upon the closing market price forNiSource on Feb. 25, the combined company would have an enterprisevalue of $13.7 billion.

“You have to be of size scope and scale to compete in thisever-increasing utility world going forward,” said Merrill Lynch’sDonato Eassey. “While there are some challenges near term, I thinkthe long-term prospects of such a combination are very formidablein terms of the number of customers that they will have, theirstorage position and their ability to arbitrage off geographicdiversification.

“While I like it, the market clearly doesn’t in NiSource’s case,but I think that will change over time,” said Eassey, referring tothe plummet taken by NiSource’s stock price yesterday. NiSourceshares crashed to a six-year low of $13/share, a 16.5% drop.

Eassey attributed it to the quirkiness of investors. “First ofall, [the market] likes anything with a dot com associated with it.That’s what the market is infatuated with. These kinds oftransactions also are usually good for the acquiree, but not theacquirer near term. The combination of those things is hurtingthem, but over time I think rational investors will prevail. If youlook at the multiple that it is currently trading at it’sridiculous, ridiculously cheap. Every acquirer’s stock takes it onthe chin initially. Look at Dominion Resources [which boughtConsolidated Natural Gas for $6.4 billion at the beginning of theyear]. See how well it performed over time after the deal?”

However, the basement level of NiSource’s stock could be a causefor concern, said Edward Jones analyst Robin Diedrich. Thetransaction requires approval by shareholders, as well asregulators in five states and the federal government. While shelikes the terms of the transaction, Diedrich expressed some doubtthat it will go forward without a hitch. She was particularlyconcerned about NiSource’s financial condition and the intentionsof NiSource’s shareholders. “This will be a very close one to watchgiven that NiSource’s stock price has done so poorly,” she said. “Ithink they have tightened up the terms enough so that it looks likeit will get done one way or another. Even if NiSource’sshareholders do not approve the deal, they can take away stockoptions and then go forward. If you look at the fact that 60-70% ofColumbia’s shares already were tendered to NiSource, I don’t thinkyou have to worry about Columbia shareholders [buying this].

“Even though they are taking on a lot of debt and they willprobably get a credit downgrade, I still think they could getNiSource shareholder approval. On the regulatory side, I don’t seemany issues. They don’t have a lot of overlap in terms of assets,”she added.

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.