NiSource finally sweetened its unsolicited offer for Columbia Energy Group with a $74/share ($6.1 billion) bid last week — up from the prior offer of $68/share. It also laid down an olive branch by inviting five of Columbia’s top managers, including CEO Oliver G. “Rick” Richard, to take seats on an expanded NiSource board. Richard was offered a vice chairmanship.

However, given the amount of bad blood between the two companies many observers wonder whether it’s too late for a friendly transaction. The two energy firms have waged war in the press and in the courts over the last four months since Indiana-based NiSource took its tender offer to Columbia shareholders. NiSource has accused Columbia of not looking out for the interests of its shareholders by repeatedly rejecting its offer and refusing to sit down to negotiate a deal. Meanwhile, Columbia has attacked NiSource’s record of high electric rates, slow deregulation and pollution from its electric generation facilities. Columbia has repeatedly said it was the wrong company offering the wrong price at the wrong time.

As of Friday Oct. 15, however, NiSource had attracted about 54% of Columbia shares through its tender offer. With the price increase, the offer has been extended to Nov. 12. “Initially NiSource received a 60% tender rate for their $68 bid, which Columbia, me and just about anyone I can think of considered an inadequate bid. So…it makes sense to think they would get a higher tender on what should be considered an adequate bid,” said energy analyst Curt Launer of Donaldson Lufkin & Jenrette. He values Columbia right now between $75 and $80/share partly because of expected results from its new communications ventures. A NiSource-Columbia combination wouldn’t be a bad one for Columbia shareholders; it just might not be the best one available, according to Launer.

Delaware law requires NiSource to received 85% of Columbia’s outstanding shares before it can proceed with regulatory filings. But Columbia is fond of noting that no hostile takeover of a utility company has ever has been approved by regulators.

Nevertheless, the 8.8% hike in the bid price may be too much to turn down. It represents a 22% premium to Columbia’s stock price on Oct. 15, a 28% premium from its 30-day average and a 45% premium from the 30-day average prior to the original NiSource offer. According to PaineWebber, the new price is roughly 21 times Columbia’s recurring 1999 earnings per share and 18 times 2000 EPS. It also is about 2.7 times Columbia’s 1999 book value.

“I think it’s a good offer,” said one analyst who asked to remain anonymous. “Our fundamental evaluation has the stock at $69.75 based on 2000 earnings. They’ve taken care of a lot of the social issues. They’ve basically offered Columbia an olive branch by saying [Columbia] has good management, offering to make Richard a vice chairman and opening up their board for Columbia management. They seem to have covered all the social issues here.

“It also may go beyond the bad blood issues because they have put so much on the table that they may get enough shares tendered to go forward. Columbia could still make it very difficult especially considering how politically connected Richard is. But the shareholders are going to come in and really start to pressure Columbia now. If 90-100% of the shares are tendered, I think the [message] would be quite convincing.”

If the deal does get a strong favorable response from Columbia shareholders, Columbia management would have to come up with an attractive white knight to prevent the transaction from being completed, said another observer.

PaineWebber’s James Yannello said the price is “more in line with our expectations of what Columbia Energy Group is worth today. If executable as presented, we believe this offer would represent a good deal for Columbia shareholders….. [G]iven the increased price and somewhat more amiable personnel terms, we are not placing such high odds on rejection this time.”

However, he also said that given the decreasing number of “desirable target companies” on the market and Columbia’s attractive asset base, an offer from another company at this time should not be ruled out. “Along those lines (and acknowledging the substantial amount of ill will created between these two companies over the past few months) we would not rule out Columbia’s board putting the company up for sale in an effort to potentially attract a more lucrative/friendly offer from another entity.”

Given the likelihood of lackluster third quarter earnings and the fact that Columbia is significantly undervalued, the company is “very much in play” at this time, Yannello said in a research note. He believes Columbia’s days of trading in the mid-$50/share soon will be over, “likely for good” because of operational improvements that are expected to kick in in the fourth quarter.

However, the raised offer received a chilly reception on Wall Street with Columbia shares gaining only $1.62 to close at $62.12. NiSource shares closed down 62 cents at $21/share. Apparently there is increasing uncertainty about the outcome of this transaction. Not only is there doubt about Columbia’s willingness to finally come to the table, but there may be an increasing number of concerns about the transaction itself and the resulting company going forward.

As PaineWebber stated in its report, there’s a question about whether NiSource can facilitate a follow-up equity offering at reasonable levels given its languishing stock price. There’s also concern about the ultimate debt rating of the merged company. Duff & Phelps Credit Rating Co. placed the credit ratings of NiSource Capital Markets on rating watch-down following the announcement. If accepted, the acquisition would be funded with approximately $2.8 billion of equity and equity-like preferred securities and $3.4 billion of debt. Additionally, NI would assume $2.125 billion of Columbia debt.

“Given the financial limitations (and the significant regulatory and timing hurdles associated with this transaction if it remains on a hostile playing field), if for whatever reason Columbia’s board rejects the $74/share offer, we would expect NiSource to call it a day and move on,” PaineWebber said.

Merrill Lynch energy analyst Donato Eassey had the opposite expectation, noting that NiSource has shown every indication it intends to push this transaction through with or without Columbia board approval.

Columbia’s board urged shareholders to take no action and said it will review the unsolicited offer and will promptly make a recommendation to shareholders (See related story).

Rocco Canonica

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