After a 10-month pursuit, NiSource Inc. has agreed to acquire Columbia Energy Group in an $8.5 billion cash, stock, and debt deal that will create the largest US natural gas company east of the Rockies.
Deal structure
Under the merger agreement the two companies announced last week, NiSource will give $70 cash plus a stock appreciation income-linked security (SAILS) coupon with a face value of $2.60 for each share of Columbia's common stock. Moody's Investor Service described the SAILS as "a hybrid instrument, mandatorily convertible into NiSource shares in 4 years."
In lieu of that, Columbia shareholders have a limited option to swap up to 30% of the company's outstanding stock in a tax-free exchange for stock in the new holding company being created by the merger. But the value of that trade is subject to a collar of $74/share if NiSource's stock price averages more than $16.50/share in the 30 days prior to closing.
If the stock averages $16.50/share or less, participating shareholders will get 4.4848 shares of the new holding company's stock for each Columbia share.
History
In October, Columbia's board unanimously rejected NiSource's slightly higher cash offer of $74/share as "inadequate and not in the best interests of the company and its shareholders."
Instead, they tried to find an alternative "white knight." But sources report Columbia Energy got no better offers from a dozen potential candidates as market prices for utility stocks deteriorated.
NiSource's original offer last May was $68/share, or a total of $5.7 billion cash. When Columbia officials quietly rejected that initial overture, NiSource went public in June with an unsolicited bid directly to shareholders that sparked a corporate battle of public letters, newspaper advertisements, and lawsuits.
By December, Columbia stockholders had tendered to NiSource more than 49.6 million common shares, about 61% of outstanding stock. But after extending its offer several times, NiSource withdrew it in mid-February to participate in Columbia's bidding process.
If Columbia's management "had taken the $74/share last fall, they could have saved a lot of headaches," a financial analyst said.
New deal benefits
However, NiSource said the new agreement provides greater flexibility to Columbia shareholders and more security for NiSource.
Under the deal, Columbia shareholders will get about $6 billion in cash and stock for their equity, and Ni- Source will assume about $2.5 billion of Columbia's long-term debt. It will be accounted for as a purchase and is expected to be dilutive to NiSource's earnings for the first year after closing sometime in 2000.
Columbia and NiSource will become subsidiaries of a new holding company with an enterprise value of $13.7 billion. It will be No. 2 in US gas sales volume at 911 MMcfd and No. 1 in gas storage with 700 bcf of capacity, officials said.
"This combination creates the leading gas competitor within the key energy corridor between the Gulf Coast and the Northeast. It will be a superregional energy company with complementary market areas and no asset overlap," said NiSource CEO and chairman Gary L. Neale.
