Western Coal Corp., a Canadian mining producer, surged as much as 51 percent after Walter Energy Corp. offered to buy the company for C$3.3 billion ($3.2 billion) to increase access to the commodity.
Western Coal rose C$3.34, or 45 percent, to C$10.72 at 2:52 p.m. in Toronto, after earlier touching C$11.15. Walter fell 36 cents, or 0.4 percent, to $95.07 in New York Stock Exchange composite trading.
Walter, based in Tampa, Florida, bid C$11.50 a share in cash and stock for the outstanding common shares of Western Coal, the U.S. company said in a statement. It also agreed to buy a 19.8 percent stake in Western Coal from the largest shareholder, Audley European Opportunities Master Fund Ltd., for C$630 million.
“A combined company would, within a year or so, be the second-largest producer of metallurgical coal in North America,” said Jeremy Sussman, an analyst at Brean Murray Carret & Co. in New York. “This deal will allow Walter to ship from the West Coast.”
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’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.”
Sussman said more mergers will occur amid the price surge for coking, or steelmaking, coal and that the price is “quite attractive for Walter” given recent transactions in the sector.
Cliffs Natural Resources Inc.’s $757 million acquisition of closely held INR Energy in July was close to 7.5 times enterprise value over earnings before interest taxes depreciation and amortization, Sussman said. Walter’s acquisition of Western would be at 5.7 times enterprise value over Ebitda for 2011, he said.
“We certainly don’t expect this to be the last transaction in metcoal land,” Sussman said.
Coal India Ltd., the world’s largest coal producer, is considering a Massey Energy Co. mine for its first asset purchase in the U.S. to help the state-run company meet demand from power stations and steel mills, three people with direct knowledge of the matter said last week.
Massey Chief Executive Officer Don Blankenship said yesterday that his company, with 1.3 billion tons of metallurgical coal reserves, will consider merger proposals at its board meeting on Nov. 21.
Alpha Natural Resources Inc., the third-largest U.S. coal company, is among those that have expressed interest in buying Massey, two people with knowledge of the matter said. ArcelorMittal, the world’s largest steelmaker, has also contacted Massey to express interest, according to one person.
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,” interim Chief Executive Officer Joe Leonard said in a statement.
The company 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.