NiSource finally sweetened its offer for Columbia Energy Groupyesterday to $74/share ($6.1 billion) from $68/share and laid downan olive branch by inviting five of Columbia’s top managers,including CEO Oliver G. “Rick” Richard, to take seats on anexpanded NiSource board. Richard was offered a vice chairmanship.

However, given the amount of bad blood between the two companiesmany observers wonder whether its too late for a friendlytransaction. The two energy firms have waged war in the press andin the courts over the last four months since Indiana-basedNiSource took its tender offer to Columbia shareholders. NiSourcehas accused Columbia of not looking out for the interests of itsshareholders by repeatedly rejecting its bid and refusing to sitdown to negotiate a deal. Meanwhile, Columbia has attackedNiSource’s record of high electric rates, slow deregulation andpollution from its electric generation facilities. Columbia hasrepeatedly said it was the wrong company offering the wrong priceat the wrong time.

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

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

Nevertheless, the 8.8% hike in the bid price may be too much toturn down. It represents a 22% premium to Columbia’s stock pricelast Friday, a 28% premium from its 30-day average and a 45%premium from the 30-day average prior to the original NiSourceoffer. According to PaineWebber, the new price is roughly 21 timesColumbia’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 toremain anonymous. “Our fundamental evaluation has the stock at$69.75 based on 2000 earnings. They’ve taken care of a lot of thesocial issues. They’ve basically offered Columbia an olive branchby saying [Columbia] has good management, offering to make Richarda 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 haveput so much on the table that they may get enough shares tenderedto go forward. Columbia could still make it very difficultespecially considering how politically connected Richard is. Butthe shareholders are going to come in and really start to pressureColumbia 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 Columbiashareholders, Columbia management would have to come up with anattractive white knight to prevent the transaction from beingcompleted, said another observer.

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

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

Given the likelihood of lackluster third quarter earnings andthe 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 soonwill be over, “likely for good” because of operational improvementsthat are expected to kick in in the fourth quarter.

However, the raised offer received a chilly reception on WallStreet yesterday with Columbia shares gaining only $1.62 to closeat $62.12. NiSource shares closed down 62 cents at $21/share.Apparently there is increasing uncertainty about the outcome ofthis transaction. Not only is there doubt about Columbia’swillingness to finally come to the table, but there may be anincreasing number of concerns about the transaction itself and theresulting company going forward.

As PaineWebber stated in its report, there’s a question aboutwhether NiSource can facilitate a follow-up equity offering atreasonable levels given its languishing stock price. There’s alsoconcern about the ultimate debt rating of the merged company. Duff& Phelps Credit Rating Co. placed the credit ratings ofNiSource Capital Markets on rating watch-down following theannouncement. If accepted, the acquisition would be funded withapproximately $2.8 billion of equity and equity-like preferredsecurities and $3.4 billion of debt. Additionally, NI would assume$2.125 billion of Columbia debt.

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

Merrill Lynch energy analyst Donato Eassey had the oppositeexpectation, noting that NiSource has shown every indication itintends to push this transaction through with or without Columbiaboard approval.

Columbia’s board urged shareholders to take no action and saidit will review the unsolicited offer and will promptly make arecommendation to shareholders.

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