Walter Energy Inc., a southern Appalachia producer of steelmaking coal, agreed to buy Canada’s Western Coal Corp. for C$3.3 billion ($3.3 billion) to add reserves and boost production of the commodity as prices rise.
Walter Energy offered C$11.50 a share in cash or 0.114 of a Walter Energy share, the companies said today in a joint statement. The deal, which has unanimous approval from both boards, follows a Nov. 18 announcement that they were in exclusive talks.
Mergers and acquisitions in the coal industry are increasing as demand from steelmakers in China, the biggest producer of the alloy, drives up prices for the raw material. Prices for coking, or steelmaking, coal sold to Asia will rise 8 percent next quarter, according to UBS AG.
“We do love coking coal,” said Ian Henderson, who manages about $7 billion at JPMorgan Chase & Co. including Western Coal shares. “We were long-term investors in this particular project, but we thought the company was too lowly valued. We are not expecting anybody else to come in and counter-bid.”
Walter previously agreed to pay C$630 million for a 19.8 percent stake in Western Coal from largest shareholder Audley European Opportunities Master Fund Ltd., it said Nov. 18.
Western Coal soared $1.30, or 13 percent, to C$11.60 in Toronto trading. The stock jumped as much as 51 percent on Nov. 18. Walter Energy rose $4.92, or 4.7 percent, to $110.52 in New York Stock Exchange composite trading.
The offer price is a 26 percent premium to the 20-day average price of Vancouver-based Western Coal through Nov. 17. That’s in line with the average premium for coal-industry deals announced this year, according to data compiled by Bloomberg.
“The offer price is a decent premium to where it was trading beforehand,” JPMorgan’s Henderson said. “For shareholders it’s probably the best that they can get.”
Rising coal consumption has prompted Rio Tinto Group, the world’s third-largest mining company, to team up with Aluminum Corp. of China on coking-coal projects in China. In the U.S., Massey Energy Co., the largest coal producer in central Appalachia, has received bids from companies including Alpha Natural Resources Inc., two people with knowledge of the matter said last month.
“The outlook for coking coal is good,” Richard Knights, an analyst at Liberum Capital Ltd., said by telephone from London. “The big picture is all about China’s move to become a net importer.”
The total amount of cash paid to Western Coal holders is expected to be about C$2.1 billion, with an estimated 9 million shares to be issued, according to today’s statement. Financing for the offer is fully committed, the companies said.
“This is a transformative transaction at a time when global demand for metallurgical coal is surging,” Joe Leonard, interim chief executive officer of Tampa, Florida-based Walter Energy, said in the statement. “Western Coal has an attractive high-quality metallurgical coal asset base and has embarked on an organic growth strategy that is expected to increase production more than 60 percent by fiscal 2013.”
Shareholder Audley said other parties, including steelmakers, were interested in its Western Coal stake.
“Walter is the best match because there were a lot of synergies, geographically, in terms of customers and management,” Julian Treger, managing partner of Audley Capital, said in an interview. “It’s likely the other shareholders will follow in accepting Walter’s offer in due course. In the absence of another alternative I don’t see why they wouldn’t approve.”
Walter Energy plans to maintain its listing on the New York Stock Exchange and will apply to sell shares in Toronto. The company expects the deal to be completed by the second quarter of 2011. Morgan Stanley is advising Walter, and RBC Capital Markets is advising Western Coal.
“With its size and financial strength, the combined business will have future growth opportunities that neither one of us would have on our own,” Keith Calder, president and CEO of Western Coal, said in the statement.
The combined entity will have total coal reserves of about 385 million tons and be the world’s largest publicly traded “pure-play” metallurgical coal producer, according to the statement. The company expects to produce more than 20 million tons a year by 2021.
“Strategically, this kind of fits,” said Jim Rollyson, an analyst at Raymond James Financial Inc. in Houston. “I like it. They now have access into Asia that they didn’t have before.”
Rollyson said barring another global economic setback, prices for metallurgical coal will remain strong and the combined company will be poised to benefit.
Western Coal will hold a shareholder vote to approve the transaction, according to the statement.