Peabody Shows Coal Deals Burn Investors With Losses: Real M&A
In the past 12 months, acquirers from Peabody to Alpha Natural Resources Inc. (ANR) have fallen as much as 41 percent after announcing more than $25 billion of deals for coal companies, according to data compiled by Bloomberg. That compares with the 32 percent gain in the first year buyers posted historically. St. Louis-based Peabody has slumped 19 percent since announcing an unsolicited bid for Macarthur Coal last month.
Companies are now paying twice the average takeover premium to secure coal reserves on the bet that demand from steel and power producers in China and the developing world will drive prices higher. While analysts project the acquirers in the three biggest deals will all report record earnings this year and next, Citigroup Inc. and Stewart Capital say that some may be paying too much in the face of a global economic slowdown and a peak in prices of metallurgical, or steelmaking, coal.
“If you look at where the deals were done versus where spot metallurgical coal prices were, it would suggest they were doing them at the peak,” said Brian Yu, a San Francisco-based analyst at Citigroup. “Investors do not want management to dilute their earnings” with costly acquisitions, he said.
Peabody, the biggest U.S. coal producer, and ArcelorMittal, the world’s largest steelmaker, agreed to buy Macarthur Coal for A$16 a share, according to a statement yesterday.
The price was 48 percent higher than Macarthur Coal’s 20- day trading average and almost three times the 17 percent premium for deals announced prior to the past year, according to data compiled by Bloomberg. The deal also valued Macarthur Coal at almost 20 times earnings before interest, taxes, depreciation and amortization, 56 percent more than the historical multiple.
The agreement came almost two months after the bidders made an unsolicited bid of A$15.50 a share, which the board of Brisbane-based Macarthur Coal rejected. Since the initial proposal on July 11, Peabody’s decline has been almost twice as large as energy stocks in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity.
“Clearly, not all deals are alike,” Vic Svec, a spokesman for Peabody, said in a telephone interview today. “It’s about choosing the right assets and paying the right price and then managing them well as time goes on. I would reject a broad-brush portrayal of growth by acquisition as somehow being negative.”
Giles Read, a London-based spokesman for ArcelorMittal (MT), didn’t immediately return an e-mail request sent outside normal business hours.
While Peabody’s shares have declined, Brean Murray Carret & Co.’s Jeremy Sussman says that ArcelorMittal’s interest in acquiring Macarthur Coal shows that demand for coal continues to increase and help support higher prices.
“It’s one thing for the acquiring coal companies to be optimistic about pricing because they almost have to be, but it’s another for the largest end-user in the world to be just as optimistic that prices will stay high,” Sussman, an analyst for Brean Murray in New York, said in a telephone interview.
Still, coal-mining takeovers in the past year have resulted in the buyers losing value. Of the seven deals valued at $1 billion or more, acquiring companies have declined 18 percent on average, data compiled by Bloomberg show. Those buyers agreed to pay an average premium of 33 percent, versus a 17 percent premium for all prior industry deals.
“It’s better to be a seller in this environment than a buyer,” Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a telephone interview. “If the economy slows, coal is going to get hurt. That means that deals priced to perfection based on realizing a certain sale price for the underlying commodities is probably not going to be realized.”
Walter Energy Inc. (WLT) of Tampa, Florida, which paid the industry’s biggest takeover premium to buy Vancouver-based Western Coal Corp., has declined 12 percent since the deal was announced in November. This month, the combined entity reported quarterly per-share earnings that fell short of analysts’ estimates by 41 percent. The announcement caused Walter Energy to plummet by the most since at least 1995.
“Our stock has been pretty volatile recently, but if you go to our second-quarter earnings release you can draw a better correlation there than any tie to the valuation paid in the recent acquisition,” Michael Monahan, a spokesman at Walter Energy, said in a telephone interview.
Alpha Natural, Massey
Shares of Alpha Natural, which agreed in January to buy Massey Energy Co. in the most expensive acquisition in industry history, has since lost 41 percent.
Abingdon, Virginia-based Alpha Natural also reported a quarterly profit this month that fell short of analysts’ projections by 16 percent. The result was weighed down by costs related to the takeover of Massey, which owned the mine that caused the worst U.S. coal mining accident in four decades.
Alpha Natural’s decline “reflects investor skepticism in regard to the price paid and the timing of transactions,” Mark Levin, an analyst at BB&T Capital Markets in Richmond, Virginia, said in a telephone interview.
Ted Pile, a spokesman at Alpha Natural, didn’t return telephone calls or e-mails requesting comment.
Takeovers increased as coal prices peaked this year. Prices surged 47 percent to a record $330 a metric ton in the second quarter from the previous three-month period as demand for the fuel in power stations and steel mills in China, the world’s largest user of coal, jumped and floods in Queensland, Australia constrained production.
Coal prices have since slipped 4.5 percent to $315 a ton this quarter, data compiled by Bloomberg show. The price of metallurgical or coking coal, an ingredient used to forge steel, will average about $275 a ton next year and $248 in 2013, according to estimates from Citigroup.
While the price for pulverized coal that Macarthur produces more than doubled to $275 a ton last quarter from 2009, it may decline to $160 a ton by the second quarter of 2012, according to Peter Hickson, Hong Kong-based global head of commodity research and basic materials strategist at UBS AG.
“The risk lies in companies that get aggressive in order to make the numbers go around,” Ari Levy, manager of the $235 million TD Energy Fund at Toronto-Dominion Bank, said in an e- mail. “They may impute a higher long-term coal price than is justified. It is quite easy to get carried away.”
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