Merrillville, IN-based NiSource confirmed yesterday what someobservers have suspected for some time: that Columbia EnergyGroup’s failed bid for Consolidated Natural Gas was partly a veiledattempt to protect itself from being targeted by a buyer. NiSourceannounced that it has had an offer for Columbia on the table sinceApril 1 but has been rebuffed repeatedly and is making its hostilebid public in an effort to pressure Columbia’s board.
“We’re announcing this offer after a formal offer to theColumbia board of directors was rejected, repeated requests fordiscussion were ignored and Columbia’s financial advisors informedus on May 28 that the company was unwilling to talk with us,” saidNiSource Chairman Gary L. Neale. “We believe that allconstituencies will find this offer to be so compelling thatColumbia’s board will no longer be able to ignore it.”
Accompanying its public announcement was a letter dated June 7to Columbia CEO Oliver G. “Rick” Richard, in which Neale reiteratedhis company’s $5.7 billion all-cash offer ($68/share). The bid is a31% premium over a 20-day average of Columbia’s share price as oflast Friday and a premium to Columbia’s all-time high stock price.NiSource also would assume about $2.25 billion in Columbia debt.
Neale said if Columbia’s board does not respond, the next stepwould be a tender offer directly to Columbia’s shareholders. “Weare confident that your shareholders will enthusiastically supportour proposal,” Neale told Richard. He did not set a deadline for aColumbia response, however.
Richard immediately fired off a sharp retort, saying the companyis “not for sale and is not interested in any merger transaction inwhich another company acquires control of Columbia. Our return toshareholders over the last three years supports our belief that thebest long-term interest of Columbia and its shareholders is forColumbia to remain an independent company free to implement overtime its strategic business plan.
“Nevertheless, in light of the formal nature of the offer setforth in your letter, your offer will be considered by our board ofdirectors. After the consideration of your offer by our board, wewill advise you of the board’s conclusions,” he said.
Richard’s response seemed quite similar to the one he receivedfrom CNG a month earlier. After a three-month battle with DominionResources for CNG, Columbia finally accepted defeat on May 11,following Dominion’s sweetened $6.4 billion offer and a revisedagreement between CNG and Dominion. Columbia was offering $6.7billion.
But Columbia vowed to continue growing its regulated businessand its unregulated energy services and marketing arm, and said itplanned to renew its search for a merger partner or a majoracquisition that will keep it among the leading energy companies.The NiSource offer turns Columbia the predator into Columbia theprey, and according to some observers, the offer likely willattract other suitors.
“I think it’s an excellent bid. I think it’s a great idea and agreat fit. Having said that, I’ve got a funny feeling this opensthe door to a bunch more bids,” said BT Alex. Brown energy analystEd Tirello. “Every big electric company is looking, all the guyswith cash. I mean you have First Energy, GPU. You’ve got Unicom,Cinergy. It probably will be one of the guys right there in theneighborhood. They’re all flushed with cash.
“I’d bet that every investment banker that wasn’t in the deal isnow trying to get somebody to come into do the deal,” Tirelloadded. “You’ve got management looking around for a white knight.They don’t want to do the [NiSource] deal because they want to stayin the business or they want to own someone else; it’s a naturalreaction. This is the beginning of the story, not the end.”
Donaldson, Lufkin & Jenrette energy analyst Curt Launer saidhe thinks the deal will be taken seriously by Columbia but in theend will be “too low to be successful.” Launer estimated theNiSource bid to be 16.2 times 2000 earnings per share, eight times2000 cash flow, 7.7 times 2000 EBITDA and 2.7 times Columbia’s bookvalue. “Our analysis shows all of these multiples to be below theranges shown by recent deals, providing an opportunity for othersto consider entering the bidding for CG, and/or NI to increase itsbid.”
Merrill Lynch analyst Donato Eassey came to the same conclusion.”It’s a decent offer. But I think Columbia will go for a highernumber 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 interms of what the company is worth as we speak.” Eassey saidfundamentally Columbia’s stock is worth close to $70 on 2000earnings forecasts. “There are people suggesting it’s worth as muchas $82/share. I’m not there.” But NiSource likely will have toincrease its bid and does seem willing to do so “if itsreasonable,” Eassey added. “They’re trying to buy it cheap still.This is the bottom of the first inning.”
Eassey likes the strategy behind the transaction. “I lovegeographic diversification. I think the management of [NiSource]has done a very good job at accumulating assets that are going toadd value. You have to have as critical a mass size as you can getin order to be competitive in the energy world today.”
NiSource’s Neale also stressed the strategic value of acombination. He said it would complete the formation of a “naturalgas distribution corridor” between Chicago and New England andbetween the Gulf Coast region and the Northeast. NiSource closed ona $780 million acquisition of Massachusetts-based Bay State Gas Co.in February and in April completed a $150 million purchase of TPCCorp., which owns a network of high-deliverability salt cavernstorage in the eastern U.S.
“This combination will create a super-regional powerhousecapable of earnings growth in excess of 12% per year primarily fromour core businesses,” said Neale. “For Columbia’s shareholders, theoffer represents full and fair value in a six- to nine-month timeframe with little regulatory risk. For NiSource’s shareholders,this transaction is accretive in the first 12 months with minimalsynergies required.” Neale predicted there would be no layoffs fromcore operational groups.
The combination would more than double the size of NiSource,creating a company with a market capitalization of $8.3 billion. Itwould be one of the largest energy distribution companies in thecountry with nearly 4 million electric, gas and propanedistribution customers, 19,000 miles of pipelines connecting theTexas Gulf Coast and the Atlantic coast, 700 Bcf of total storagecapacity, and 800 Bcf of gas reserves. The acquisition wouldrequire shareholder approval as well as authorization from the SEC,FERC and five state regulatory agencies.
Columbia’s stock price soared 13%, or $7.25, on the newsyesterday to $63/share. NiSource stock fell 2%, or $0.69, to$27.50/share.
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