Walter Energy Inc., a southern Appalachia producer of steelmaking coal, offered to buy Canada’s Western Coal Corp. for C$3.3 billion ($3.2 billion) to increase its access to the commodity as rising demand drives up prices.
Walter Energy, based in Tampa, Florida, bid for the outstanding common shares of Western Coal at C$11.50 a share in cash and stock, the U.S. company said in a statement, adding that it’s in exclusive talks. It also agreed to buy a 19.8 percent stake in Western Coal from largest shareholder Audley European Opportunities Master Fund Ltd. for C$630 million.
“A transaction with Western Coal would be transformational for our company,” Joe Leonard, interim chief executive officer of Walter Energy, said in the statement. “The combined company would be the leading publicly traded pure-play metallurgical coal producer in the world.”
Producers are seeking to add assets and expand reserves as prices for coking, or steelmaking, coal advance. Demand from Asia drove fourth-quarter prices up 62 percent from a year earlier to $209 a ton, according to a benchmark contract between BHP Billiton Ltd., the largest exporter, and Japanese steelmakers JFE Holdings Inc. and Kobe Steel Ltd.
Walter Energy’s bid represents a 59 percent premium to Western Coal’s 20-day average price of C$7.23 on the Toronto Stock Exchange. That compares with an average premium of 24 percent for coal-industry deals announced this year, according to data compiled by Bloomberg.
“An almost 60 percent premium seems a lot,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets in New York. “As the largest shareholder supports it, some kind of deal will eventually happen.”
Walter Energy will begin due diligence “immediately” with a view to reaching an agreement in the next two weeks, Leonard said today on a conference call.
Morgan Stanley is advising Walter, and Simpson Thacher & Bartlett LLP and Osler Hoskin & Harcourt LLP are legal counsel. Western Coal is using Royal Bank of Canada, Cenkos Securities Plc, Goodmans LLP, Paul Weiss Rifkind Wharton & Garrison LLP, and Trowers & Hamlins LLP.
Global Steel Production
Walter has forecast more than 50 percent growth in global steel output in the next decade, boosting consumption of coking coal. “China, Brazil and India will continue to see major growth; these dynamics will increase demand,” Leonard said.
Walter will raise its output by 36 percent to 9.5 million tons in 2012, while Western Coal, which operates in Canada, the U.S. and Britain, is targeting production of 11 million tons in the fiscal year through March 2013, up from 6.7 million tons in fiscal 2011, according to the statement.
“The increase in production and reserves would position the new entity to capitalize on the current and anticipated strength in the global metallurgical coal markets,” Walter said.
Massey Energy Co., the largest Central Appalachian coal producer with 2.8 billion tons of reserves, will consider merger proposals from steelmakers at a board meeting on Nov. 21, CEO Don Blankenship said yesterday in New York. Closely held U.S. producer Drummond Co., which has assets in Colombia, may be targeted by BHP, UBS AG said Nov. 5.
Walter Energy and Western Coal won’t pay penalties if a “definitive agreement” isn’t reached and the exclusivity agreement between them isn’t binding, according to a separate statement from Western Coal.
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