Midway through round four of the NiSource-Columbia bout last week there still was no clear leader as CEOs for both companies went back to gnawing at each other’s ears. It’s been four weeks since NiSource Chairman Gary Neale threw the first punch with a $5.7 billion, $68/share offer for Columbia Energy Group’s outstanding shares, and it’s now two weeks before that offer expires.

While Neale filed merger-related material with regulators last week, Columbia defended adjustments made to the golden parachutes of Columbia’s executives and continued attacking the financing behind the NiSource bid. So far, Columbia CEO Oliver G. Richard has been focusing on several potential weaknesses in NiSource’s arsenal: the price, which many observers and investment bankers agree is too low by $5-$10/share; its plan to issue $2.6 billion in equity, the largest ever by a U.S. utility, to retire part of the $6 billion loan from Credit Suisse First Boston and Barclays Bank; and the high regulatory hurdles that must be crossed to complete the deal.

In the meantime, NiSource has been working on Columbia’s midsection. Although there’s been no official tally yet, unofficial estimates place the number of Columbia shares tendered to NiSource between 30% and 50%. Columbia shareholders clearly have shown they are interested in the offer, despite the fact that many consider it too low a price. NiSource also continues to say it’s willing to up the ante if Columbia will sit down at the table.

Columbia’s board, however has shown no signs of giving in. A Columbia spokesman indicated the amount of tendered shares still is not enough to pressure Columbia into negotiations. The company continues to say it’s the wrong price at the wrong time and with the wrong company, although it still has not found a white knight to take on NiSource — many potential third parties have been named, including several foreign suitors (see NGI July 19).

NiSource threw a hard right cross last week, filing the necessary information under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 with the Federal Trade Commission and Department of Justice. Neale said it “sends a serious message to Columbia that we are committed to completing this transaction and that we are confident in our ability to secure the necessary regulatory approvals. We have said throughout that we believe the regulatory approval process can be completed within six to nine months if we work together. HSR clearance is an important first step, and one that confirms our commitment to move forward on all fronts of this transaction.” Richard easily shook off the blow, however, noting it’s “the only regulatory approval for which receipt is clearly not an issue.”

But Neale came back with a jab to the head, calling on Columbia officials to provide detailed information to shareholders regarding increased “golden parachutes” approved for 30 of Columbia’s top officials and demanding that Columbia correct the “mischaracteriz[ations]” made regarding NiSource’s proposed financing of the transaction.

Neale said he was “distressed to hear that you and your chief financial officer, Mike O’Donnell, repeatedly mischaracterized the financing” during an earnings teleconference. In response to direct questions from two of Columbia’s largest investors, “you and your CFO avoided the truth, saying you refused to meet with us because of the so-called risk that Columbia shareholders will not get the cash due to the ‘huge equity takeout required to do the financing.’ This explanation is absurd.” Columbia shareholders will be paid $68/share at the time of closing, he said. “You know full well that any requirement for equity would occur as part of a refinancing after the merger,” said Neale. “Therefore, I expect you to publicly correct this false statement.”

The financing has raised some eyebrows, however. As Richard keeps noting, the debt-to-capitalization ratio (84% debt) upon closing would be higher than that of any other energy utility in the U.S., and NiSource would have to complete a subsequent equity offering larger than any ever completed by a U.S. energy utility. If approved by regulators, the transaction also would be the first hostile utility acquisition in U.S. history. “Based on may past experience as a regulator,” said Richard, “I believe regulators will view your offer as patently hostile and highly leveraged.”

And regarding the golden parachutes, Richard shot back that “NiSource itself has such arrangements” which are fairly standard.

And so the heavyweight battle continues. Some observers believe the next move for NiSource will be to raise its offer to the low $70s/share because it’s only two weeks away from the tender deadline and apparently still lacks a majority. Columbia has a strong defensive position, but few doubt it could win the bout handily if it brought in a white knight. (For prior stories see NGI July 19, July 12, June 28, June 14).

Rocco Canonica

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