InterNorth Will Make $2.3-Billion Offer for Houston Natural Gas

Times Staff Writer

InterNorth Inc. said Thursday that it will acquire Houston Natural Gas Corp. in a $2.3-billion deal that will give the merged company the second most extensive natural gas pipeline system in the country.

According to a definitive merger agreement signed Thursday, a subsidiary of Omaha-based InterNorth will begin a $70-per-share cash tender offer today for all outstanding common shares of HNG. The offer is conditioned on InterNorth's being able to acquire at least half of HNG's outstanding shares, which totaled 35.3 million as of Dec. 31, 1984.

Both InterNorth and HNG have natural gas transmission lines and distribution operations. InterNorth's 36,200 miles of gas pipeline stretch from Canada to the Mexican border but are mostly concentrated in the upper Midwest.

HNG's 14,000-mile transmission network extends from Florida to California, with the heaviest concentration in its home state of Texas.

The merger will create the first natural gas transmission network to extend virtually coast to coast and border to border, the companies said. Only Tenneco, a Houston energy company, operates a more extensive natural gas pipeline, according to industry analysts.

'Very Expensive' Protection

The companies began the merger discussions several days ago based on "what the combination would do for both companies," said Hardie Davis, spokesman for HNG.

However, analysts said the merger agreement is "very expensive" protection for both companies against a possible hostile takeover.

Last year, HNG successfully fought off an unfriendly takeover bid by Coastal Corp., another Houston energy company. Wall Street speculation about a possible hostile takeover bid for InterNorth boosted its stock by almost 20% last month. That talk was revived Monday when InterNorth said it had arranged a $2.5-billion line of credit from a group of banks led by Citibank.

James B. Ritchey, an analyst with Herzfeld & Stern in New York, said the merger "is not particularly beneficial to either company except to avoid an unfriendly takeover bid."

And, he said, because of the huge debt burden that the new company would assume, the acquisition "will not strengthen anything except their defenses."

Analysts said the growth of the combined company will be slowed by the debt burden that it will assume to complete the merger.

Through two recent acquisitions of its own, HNG has increased its debt load to 59% of its net worth; InterNorth's debt amounts to 38%, according to HNG figures. The merged company, according to Standard & Poor's, would face a total debt leverage of 74%.

InterNorth Stock Falls

InterNorth spokesman Randal Blauvelt said, however, that the company will benefit from the addition of HNG's significant pipeline operations in the Sun Belt states, particularly California, Texas and Florida, which it called the three biggest growth states for the industry.

Investors, meanwhile, showed little enthusiasm for the merger's benefits to InterNorth. In trading on the New York Stock Exchange, InterNorth's stock dropped $3.50 to $48. HNG's stock, on the other hand, climbed $8.50 to $67.125.

The defensive nature of the merger pact was revealed in options granted to InterNorth in the event that the tender offer fails to achieve the minimum 50% of outstanding shares.

If the acquisition is not completed, the companies said, InterNorth has the option to buy almost 6 million shares of HNG, at $70 a share, and two-thirds of HNG's Texas intrastate pipeline subsidiaries--the assets that generate the most revenue--for $867 million.

Without those properties, HNG would no longer be such a desirable takeover target, analysts say.

InterNorth officials said the merger was not prompted by the revelation that Minneapolis financier Irwin L. Jacobs, one of several so-called corporate raiders, owns a stake in the company.

An executive at InterNorth said the company's strategic plan included a number of possible acquisitions, and HNG has been high on InterNorth's list for several years.

InterNorth spokesman Blauvelt said that company executives had become aware of Jacobs' stock purchases "within the last couple of days" and that Jacobs telephoned Sam F. Segnar, InterNorth's chairman, president and chief executive, either Friday or Monday.

The nature of the conversation was "friendly," Blauvelt said. He would not comment on how much InterNorth stock is owned by Jacobs, and Jacobs was not available for comment.

Some Overlap Expected

Spokesmen for the companies said many details of the merger remain to be finalized. Neither company would say what layoffs are anticipated, but Blauvelt acknowledged that there would be some overlap in the new company's operations.

The merger agreement did spell out a resolution to one of the most visible overlaps in the two companies' operations: Both have aggressive, well-respected and relatively young men serving as chairman-chief executive.

Segnar, 57, will remain as chairman and chief executive of the combined company, and Kenneth L. Lay, 42, HNG's hard-driving chairman and chief executive, will become president and chief operating officer of the combined company.

However, on Jan. 1, 1987, Lay will succeed Segnar as chairman and chief executive, with Segnar taking the title of senior chairman, the companies said.

Since taking over the helm of HNG last year, Lay has led the company through a program of shedding non-oil assets and acquiring two other pipeline operations for about $1.2 billion.

The combined company is to be called HNG InterNorth until a new name is chosen by shareholders, the companies' joint statement said.

Also, InterNorth's board will be expanded to 20 directors from 12, with the new directors being designated by HNG's current board.

Revenue of $7.5 Billion

InterNorth officials said the company might be required to divest some of its operations to meet antitrust standards and gain federal regulatory approval.

InterNorth reported earnings of $296.8 million from continuing operations last year on revenue of $7.5 billion. It has 10,000 employees.

Also Thursday, InterNorth reported first-quarter earnings of $113.9 million, down 14% from profits of $133.5 million in the year-ago quarter.

Revenue increased 81% to $2.9 billion from $1.6 billion in the 1984 period.

HNG, with 3,100 employees, earned about $122.8 million from continuing operations last year on revenue of $2 billion.

The HNG figures, company officials said, are all restated to reflect the switch in its fiscal year to a Dec. 31 ending date from a July 31 close.

THE COMPANIES AT A GLANCE HOUSTON NATURAL GAS The Houston company neared completion of a restructuring program in 1984 in which it disposed of businesses unrelated to oil and gas and acquired other businesses. The company is involved primarily in natural gas transmission and sales, oil and gas exploration and production, and gas processing and marketing. For year ending Dec. 31, 1984,in thousands of dollars.

Revenues $2,007,734 Operating income 245,305 After-tax operating income 122,797 Total Assets 3,732,108

INTERNORTH The Omaha, Neb. energy company is involved in both wholesale and retail distribution of natural gas, liquid products extraction and transportation, petrochemical production, oil and gas exploration and coal mining. For year ending Dec. 31, 1984, in thousands of dollars.

Revenues $7,510,377 Operating income 955,744 After-tax operating income 296,816 Total Assets 6,122,042

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