Alpha Natural Resources said Tuesday it plans to buy rival Foundation Coal for about $1.4 billion in stock in a deal that would transform two regional companies into the US's third-largest coal producer.
Foundation Coal shares jumped almost 18 percent in midday trading while Alpha Natural Resources shares fell almost 9 percent.
"This is exactly the sort of transformational combination that Alpha was talking about for some time and we believe that this is absolutely the right time to do it," Alpha Chief Executive Mike Quillen said during a conference call with securities analysts.
He said the companies have each consistently generated cash and together will "have one of the industry's strongest balance sheets and credit profiles."
Combined, the companies expect to have approximately $743 million in cash and available credit at a time when it's difficult to raise or borrow money. They also expect to cut annual costs $45 million by 2010.
Foundation Chief Executive James Roberts said the timing was right for creating a bigger coal company despite what he called growing opposition to coal from the Obama administration.
"We can't generate the energy we need without coal," Roberts said during the call.
He said coal generates about half the nation's electricity. "By everybody's estimates that amount is going to increase over the next 20 years," he said.
Under President Barack Obama, the Environmental Protection Agency has begun scrutinizing — and objecting to — permits for surface coal mines in the eastern U.S. and the Interior Department has taken steps to reverse a mining-friendly stream buffer regulation adopted late in the Bush administration.
Quillen said the deal dilutes his company's risk from environmental regulations. Alpha operates in West Virginia, Virginia, Kentucky and Pennsylvania, where resistance to surface mining is strongest. Besides operations in Appalachia, Foundation has mines in Wyoming, where surface mining faces less resistance.
"It does actually spread out the risk," Quillen said during the conference call. The Powder River Basin in Wyoming and Montana "is not under the same pressures that we are."
Alpha and other large coal companies routinely say they're scouting for acquisitions, but deals such as Teck Cominco's takeover of Fording Canadian Coal Trust last year and St. Louis-based Peabody Energy's purchase of Australia's Excel Coal in 2006 have been the exception. More common have been smaller deals such as Russian metals company Mechel OAO's recent purchase of Appalachian coal producer Bluestone Industries for $436 million plus 83.3 million preferred shares of stock.
"I want to thank you for letting us all release the breath that we have been holding regarding coal M&A for so long," Goldman Sachs analyst Justine Fisher said during the conference call.
Abingdon, Va.-based Alpha itself agreed to a $2.7 billion takeover by Cleveland-based iron ore producer Cliffs Natural Resources. The deal drew objections from Cliffs' largest shareholder and was scuttled in November.
Less than a month later, Alpha warned that the slowing economy could shave as much as $95 million from 2009 profits.
Nearly all the major coal companies, from Peabody Energy Corp. to Canonsburg, Pa.-based Consol Energy, have followed suit and cut production estimates for 2009. Despite lower demand, they've largely been cushioned by 2009 supply contracts signed when prices had reached record levels last summer.
In addition to what Alpha Natural Resources Inc. is paying in stock for Foundation Coal Holdings Inc., it will assume $530 million in debt. The companies value the total transaction including debt at about $2 billion.
Combined, Alpha and Foundation would have generated $4.2 billion in revenue last year.
They would control 59 mines and 14 processing plants and a combined 2.3 billion tons of coal reserves, making them the nation's No. 3 producer behind Peabody Energy and Arch Coal.
Linthicum Heights, Md.-based Foundation shares jumped $4.16, or 17.9 percent, to $27.40 in midday trading Tuesday, while Alpha shares fell $2.53, or 8.8 percent, to $26.33.
Shareholders of Foundation would receive 1.084 shares of the new company for each share held, or about $32.73 per share — a 41 percent premium over Monday's closing price. Alpha shareholders would own about 59 percent of the combined companies.
Current Alpha President Kevin Crutchfield would take over as chief executive and Foundation President and Chief Operating Officer Kurt Kost would become president. Mike Quillen would become chairman and Roberts, who is retiring in June, would hold one of four Foundation seats on the board of the combined companies. Alpha would have six board seats.
A spokesman for the United Mine Workers labor union declined to comment on the proposed deal. The UMW represents miners at two Alpha operations in Virginia and two Foundation operations in Pennsylvania.
Both boards approved the deal, which is targeted to close later this year.
Source: Associated Press
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