Columbia Energy Group’s (CG) board once again told NiSource, inno uncertain terms, to take a hike yesterday and urged CGshareholders to reject NiSource’s $68/share ($5.7 billion) hostiletakeover offer. NiSource took its offer to shareholders June 25 andsaid it will continue to fight for the deal. It had no tally ofshares tendered as of yesterday but said numbers would be availableby the weekend.
In a sharply worded letter to NiSource Chairman Gary Neale,Columbia CEO Oliver G. (Rick) Richard said NiSource’s series ofunsolicited proposals “have been for the wrong price, at the wrongtime, and with the wrong company.” He reiterated that Columbia is”not for sale,” adding that a merger of the two companies “is notcompelling.”
“Columbia has unique and highly attractive assets located inhigh-demand markets on the East Coast. NiSource’s existingbusinesses appear to consist primarily of high-cost generationassets serving low-growth markets,” Richard told Neale. “Columbiahas a talented and experienced management team that has developed astrong, forward-looking strategy. NiSource has yet to prove itsability to compete successfully in an increasingly deregulatedenergy market.”
But the bottom line is Columbia’s board still believes theNiSource offer is “inadequate from a financial point of view,” andmany of its “largest shareholders and the analysts covering ourindustry” agree, Richard said.
After careful review of NiSource’s formal offer, Richard saidcontrary to NiSource’s claims Columbia is not convinced the mergerwould be accretive in the first year. Rather, it believes thecombination would be “substantially dilutive.”
“Unless you are quietly planning massive layoffs or rateincreases, we do not believe you will be able to achieve the kindof synergies you would need for the transaction to be evenmarginally accretive, let alone achieve the 10 to 12% annualearnings per share growth that we are seeking for our company on astand alone basis by 2001,” he said.
Columbia’s board also believes the plan would run into seriousregulatory trouble because of NiSource’s plan to borrow $5.7billion to afford the purchase, creating a “highly leverageddebt-to-capital ratio of approximately 84% at closing. We alsobelieve there are significant risks inherent in your plans toreduce that debt with a $2.6 billion equity offering-which wouldbe, by far, the largest such offering in the utility industry,”Richard said.
“It is unfortunate that, in your apparent need to find asolution for NiSource’s vulnerabilities in an increasinglycompetitive environment, you are attempting a 1980s-style hostiletakeover of our company,” he added. “We agree with you that yourcostly and disruptive tender offer and related lawsuits are a wasteof valuable resources-particularly since NiSource has publiclyclaimed that the tender offer is little more than a ‘no-cost,no-risk, fully reversible’ shareholder referendum.”
NiSource took the news in stride, saying it would continue to”vigorously pursue” its offer. NiSource claims Columbiashareholders representing 50% of its outstanding shares would liketo see the merger happen. Neale made the case to Columbia’sshareholders recently that compared to 20 other similar deals inthe industry, NiSource’s bid stacks up well. The offer is “10.7times and 15.8 times last twelve months EBITDA and EBIT, comparableto the mean of 9.5 times and 15 times paid in 20 comparabletransactions completed since April 1996, including DominionResources’ acquisition of Consolidated Natural Gas,” Neale said.”Furthermore, NiSource’s 35.3% premium to the average closing pricefor the four weeks preceding the announcement compares to a 39.5%average premium for the 20 comparable deals. NiSource is proposingto pay 23.4 times last 12 months earnings and 2.7 times year-endbook, compared to the mean of 24.2 times and 2.4 times for thecomparable deals.
“We believe our offer is fair compared to similar transactions,and it’s worth noting that, looking at the multiples, Columbia’soffer for Consolidated Natural Gas three months ago was similar,”Neale told shareholders. “Of course, we’re willing to pay more, butwe don’t want to bid against ourselves. We need to meet Columbia’steam across the table and discuss how we can better our offer,” hesaid.
Neale noted Richard isn’t promising Columbia shareholders a $68share price “now or in the future. Everything else is a smokescreen designed to obscure the true value of what is on the table,”he said.
Columbia still has not decided how to prop up its slumping shareprice. The 52-week range on Columbia’s stock is$42.88-$64.63/share. Two weeks ago, the company was consideringbuying back 10% of its outstanding shares to try to up its shareprice higher than $68, but no further details have been announced.Columbia’s share price fell $0.31 yesterday to $63.88/share.
NiSource has set a deadline of Aug. 6 for its offer. Even ifNiSource is able to gain 51% of Columbia’s shares, however, amerger still would require Columbia board approval and the approvalof regulators.
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