UPDATE: Alpha Natural Resources To Buy Foundation Coal
May 12 2009 - 10:26AM
Dow Jones News
Alpha Natural Resources Inc. (ANR) on Tuesday said it will buy
Foundation Coal Holdings Inc. (FCL) for about $1.5 billion in stock
as it looks to diversify and expand its operations.
The combined company will be the third-largest coal producer in
the U.S., with reserves of more than 2.3 billion tons. The deal
brings together Alpha Natural's operations in the eastern U.S.,
including a leading position in the production of coal used in
steel, with Foundation's mining operations in Wyoming's Powder
River Basin.
The deal comes as U.S. coal producers, which boast strong cash
reserves after garnering record prices last year, hunt for merger
and acquisition opportunities. Massey Energy Co. (MEE) and Peabody
Energy Corp. (BTU) have expressed interest amid a tumble in coal
prices and demand. Arch Coal Inc. (ACI) is expanding its production
in the Powder River Basin, buying a mine there from Rio Tinto Ltd.
(RTP).
Shares of Foundation surged following the announcement, recently
trading up 23.4% to $28.71. Shares of Alpha Natural were down 5% to
$27.41.
Under the deal, Foundation shareholders will get 1.084 shares of
the new company for each share of Foundation. Based on Monday's
closing prices, the offer amounts to a 36% premium, valuing each
share of Foundation at $31.28.
Foundation shareholders will own 41% of the combined company.
Alpha Natural will also take on about $530 million of Foundation
debt and use cash on hand to repay $233 of its borrowings. The deal
won't require financing.
Alpha Natural Resources was being watched particularly closely
for M&A activity because of its strong liquidity position. The
company at the end of the first quarter had $693 million in cash
and cash equivalents and $521 million in long-term debt.
The combined companies expect about $45 million a year in annual
revenue and cost savings starting in 2010 and for the deal to add
to earnings and cash flow next year. It is expected to close in the
second half of the year.
"For (Foundation) shareholders, the transaction makes sense as
they receive a nice 35% premium to yesterday's closing price and
are able to be a part of a larger organization with a sound balance
sheet," analysts at Simmons & Co. wrote in a note to
clients.
During a conference call following the announcement, the
companies said the deal provides Alpha Natural with an opportunity
to enter the Powder River Basin, getting access to low-cost
surfacing mining operations that supply power plants.
These western mines help reduce the risk the company faces in
the eastern U.S. amid tighter environmental regulations. Alpha
Natural already is the largest U.S. supplier of metallurgic coal to
steel industry, a smaller but more lucrative market. Both companies
mine coal for power plants in the eastern U.S.
"We have an extremely balanced portfolio of assets and
reserves," said Michael Quillen, chairman and chief executive of
Alpha Natural, during the call.
Alpha Natural said it doesn't expect the resistance from
shareholders that a failed deal last year with Cliffs Natural
Resources Inc. (CLF) faced.
In November, Alpha and Cliffs terminated their $10 billion
merger pact, citing the economic environment and other concerns.
The deal faced pushback from Cliffs' largest shareholder, Harbinger
Capital Partners. The deal's end also came as the market for iron
ore almost collapsed and metals prices plunged.
Although concentrating on this deal, Alpha Natural said the
combined company would be interested in additional M&A
activity, including the purchase of distressed assets.
Under the deal, Quillen will become chairman of the combined
company and Kevin Crutchfield, Alpha's president, will become chief
executive. James Roberts, Foundation's chairman and chief
executive, will become a member of the combined company's board of
directors and Kurt Kost, Foundation's president and chief operating
officer, will become president of the combined company.
-By Mark Peters, Dow Jones Newswires; 201-938-4604;
mark.peters@dowjones.com
(Kerry E. Grace contributed to this report.)