In rejecting NiSource’s revised tender offer of $6.1 billion ($74/share) last week, Columbia Energy Group’s board announced that it authorized management to begin considering all options, including a sale of all or part of the company to a third party, possibly even NiSource.

The announcement made it appear as if Columbia finally is willing to sit down and negotiate a deal with NiSource. However, in a letter to NiSource Chairman Gary Neale, Columbia CEO Oliver G. (Rick) Richard made clear that Columbia still believes a NiSource-Columbia combination would be a bad idea.

Richard said the revised offer, which represents an increase from the prior offer of $68/share, was determined to be inadequate based on written opinions from Morgan Stanley Dean Witter and Salomon Smith Barney Inc. (see NGI, Oct. 25). “In addition to the financial inadequacy of the offer, the board continues to be concerned about the significant conditions and regulatory hurdles associated with the NiSource proposal,” the company said in a statement. It urged shareholders to hold onto their shares until a more favorable alternative is found.

Richard told Neale that Columbia’s board authorized management to “explore and evaluate a number of strategic alternatives to generate shareholder value greater than that which Columbia’s business plan or the revise offer can create.

“As part of that process,” he said, “we will initiate discussions with third parties — including NiSource, if it is interested — regarding possible transactions designed to significantly enhance value for our shareholders. We intend to consider a variety of strategic alternatives, including an extraordinary transaction, such as a merger, reorganization or the disposition by Columbia of a material amount of assets. Of course, there can be no assurance that this process will result in any such transaction.

“We continue to have serious questions about the strategic and financial merits of a combination of our two companies, as well as about NiSource’s ability to satisfy the conditions of its financing commitments and successfully complete a transaction of the magnitude required. Nonetheless, be assured that we will attempt to accommodate NiSource’s participation in this process.”

A NiSource spokeswoman said the company had no formal response. Although it was disappointed in Columbia’s rejection of the revised offer, it views the small opening for negotiations as “positive.” She said at this time, however, NiSource still intends to keep its tender offer on the table for Columbia shareholders until the Nov. 12 deadline.

The move, which has been expected for some time, was greeted favorably by Wall Street. NiSource shares gained 38 cents Monday after the announcement to close the day at $20.31/share. Columbia shares gained $2.50 to close at $64.50.

Analysts are completing their short lists of companies likely to jump into the bidding. Most expect a regional electric utility with deep pockets to sweep Columbia off its feet. PaineWebber electric utility analyst Barry Abramson said his list includes the Consolidated Natural-Dominion Energy combination, Southern Company, FirstEnergy, GPU, Unicom-Peco and Reliant Energy.

He said he expects CNG-Dominion would be very interested in the local distribution assets, while Southern would want to grab Columbia’s transmission and storage but would leave behind the distribution. Because the Unicom-Peco merger-of-equals isn’t stretching the financial resources of either company, they would be likely candidates. GPU already has indicated it is prepared to do whatever it takes to increase shareholder value. And Reliant has been disappointed with its South American investments and might be interested in finally tapping into some prime Northeast market access, said Abramson. Other potential suitors previously mentioned include Cinergy, KeySpan and Paris-based Vivendi, which is in the process of attempting to sell its share of Sithe Energies.

Rocco Canonica

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