By the close of trading last Friday, Columbia Energy Group’s$6.7 billion unsolicited bid for Consolidated Natural Gas still hadthe 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 toColumbia’s announcement is what prompted Columbia to renew its planto break up the Dominion-CNG merger last week. Columbia CEO OliverG. Richard said on Feb. 20 his company unsuccessfully tried toconvince the CNG board its bid was the better one.

“We are pursuing this transaction on a negotiated basis and wewill withdraw our offer on May 3 if CNG does not respond to usfavorably by then,” Richard said last week.

Columbia is offering $70 for each share of CNG stock, consistingof $24.50 in shares of Columbia stock and $45.50 in cash. Thatcompares with Dominion’s offer of 1.52 shares of its stock (whichclosed a $40.25/share on April 23) for each share of CNG stock, orabout $61/share.

However, CNG will be weighing more than just the current valueof the two offers in making a decision about its future in theenergy industry. One deal offers the long-term benefits ofsignificant consolidation of gas distribution, storage,transmission and E&ampP operations, but the other offersopportunities presented by convergence of the gas and electricindustries and is further along in the regulatory process – theDominion-CNG merger was filed with state and federal regulators twoweeks ago.

In a conference call early last week detailing the Columbiaoffer, Richard presented a long list of reasons his company’sconsolidation plan is far superior to Dominion’s convergencemerger. The Columbia transaction has a higher probability ofrealizing greater synergies, he said, predicting about $250 millionin savings in the second year following merger completion and $300million in annual savings thereafter, with about one third of thosesavings going to ratepayers.

More than 85% of CNG’s customer base is in the same states asColumbia’s, Columbia CFO Michael W. O’Donnell noted. The remainingCNG customers are in states adjacent to Columbia’s operations. Thecombined company would have more than 4 million customers. A mergeralso would combine the largest (CNG’s) and second largest storageoperations in the country, both of which are located in theNortheast. The combined company would have about 750 Bcf of workinggas storage capacity, or 23% of the total working gas capacity inthe United States, according to data from the American GasAssociation.

The combined entity would have nine local distribution companiesand would be the seventh largest independent gas and oil producerin the nation with 2.5 Tcfe of proved gas reserves. “It would be anexcellent financial, strategic and cultural fit,” said Richard.

Dominion announced its friendly takeover of CNG in February andthe two companies have since filed all their applications withstate and federal regulators and have started restructuring theiroperations to accommodate the combination. Last week, Dominionstarted its road show to promote the merger, which would form thenation’s fourth largest gas and electric utility company with fourmillion customers. Dominion and CNG already are in the process ofidentifying locations along CNG’s web-like northeastern pipelinesystem for gas-fired power generation plants.

Dominion CEO Thos. E. Capps said Columbia’s “hostile offer is anintentional distraction to the creation of America’s premiere andfirst fully integrated electric power and natural gas company.

“Even minimal review shows Columbia’s offer is not as attractiveto CNG’s shareholders as Dominion’s,” Capps said. He said theColumbia offer “contains few growth initiatives.”

It also would “not be tax-free, unlike our offer, and would besubject to capital gains tax.” CNG shareholders would not benefitfrom Dominion’s $3.90 dividend. “Columbia will offer the equivalentof only 40 cents per share.” And the balance sheet of the combinedcompany would be “strained by a more than 60% debt-to-equityratio.”

Capps said it is hard to believe that earnings would beaccretive in the second year of the Columbia deal, given thatpurchase accounting and goodwill amortization would cost theenterprise $130 million per year after tax, additional interestexpenses would be in excess of $200 million after tax and thetransaction costs would include a penalty payable to Dominion inexcess of $200 million.

He also predicted a Columbia-CNG consolidation would result in”huge layoffs” and that antitrust laws might require divestiture ofkey Columbia and CNG assets. “Certainly, the proposed buyout willtake much longer than Dominion’s to get approved.”

Richard admitted the Columbia transaction could take until theend of 2000 to process through all the regulatory channels, incontrast to the Dominion-CNG merger which is expected to becompleted by year end. But he said Columbia expects no majorregulatory roadblocks to the deal and no asset divestitures.

Ronald J. Barone, an energy analyst at PaineWebber, said despitethe huge amount of storage, distribution and transportation assetsbeing placed under one roof through a Columbia-CNG deal he doesn’texpect any regulatory backlash. “No, I don’t anticipate anyregulatory problems with this merger. We’re talking about regulatedopen access operations. Plus they say about one third of thesavings will be going to ratepayers. That’s got to make theregulators happy.”

Barone said the Columbia offer is far superior to DominionResources’ offer. “It’s the price, mainly. We had a $68/sharetarget for any takeover of CNG. [Columbia’s offer] is $70 share. Ifyou 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 thestockholder’s sake you take the Columbia offer.

“Columbia also has much greater earnings prospects thanDominion,” he added. “I don’t follow Dominion, but if you look atFirst 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 theColumbia bid over Dominion’s. “Our initial reaction to this news isfavorable from the standpoint of the poor performance of CNG beforeand since it agreed to merge with Dominion Resources in a deal thatvalues CNG at 1.52 shares of [Dominion stock] or about $60currently. Including an expected decline in [Columbia stock price]of about 10% on this news, in our opinion the [Columbia] bid issuperior 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 willmake a decision shortly. Meanwhile CNG came under legal pressurelast week from several of its shareholders who charged thecompany’s directors with refusing to fulfill their fiduciary dutiesto shareholders by not considering Columbia’s offer. CNG spokesmanDan Donovan said the “lawsuits are without merit” because thecompany did review the initial Columbia bid and will review it onceagain.

“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 $39and a little bit, which is up from where it was before all thisstarted, indicating that their shareholders might be happier ifDominion didn’t succeed here, which is sort of an interestingcomment.” It was somewhat ironic that Dominion’s stock price wasrising last week probably because stockholders believed Dominionmight lose out on the deal and avoid the earnings dilution from themerger, but that rise in Dominion’s stock price was making theexisting 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 youlonger term but shorter term it’s going to take a lot of time toget 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 theidea that there’s another bidder for the company that’s willing topay a higher valuation.

“Despite the numbers Dominion has quoted to me, I would twisttheir words around and say I do consider the Columbia offer rightnow to be superior,” Launer added, “even with the [exit fee, goodwill cost and other charges] Dominion mentioned included. We’llhave to stay tuned.”

Both transactions “have merit,” said AG Edwards energy analystDoug Fisher. “It’s just your perspective. It’s who’s offering youmore value over the long term.”

Rocco Canonica

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