Walter Energy Buyer Seen as BHP-ArcelorMittal Converge: Real M&A

Walter Energy Buyer Seen as BHP-ArcelorMittal Converge
The Walter Energy Inc. mining offices stand in Brookwood, Alabama, U.S. Photographer: Gary Tramontina/Bloomberg

Walter Energy Inc. may finally lure buyers willing to bet on a recovery in coal prices with the industry’s cheapest stock.

After losing almost half its value in the past year, the producer of steelmaking coal sold for 9.3 times earnings this week, according to data compiled by Bloomberg. That was less than any North American coal-mining company with $1 billion in market capitalization. The slide also drove down the value of Walter Energy to 1.7 times its net assets this month, the lowest since the last bear market in U.S. equities, the data show.

While a surge in coal prices last year led to the biggest wave of coal deals, most acquirers were left with losses as demand for the commodity collapsed. Walter Energy, which bought Western Coal Corp. for $5.3 billion in April, is an attractive target because it produces high-grade steelmaking coal, Brean Murray Carret & Co. said. A buyer could spend double Walter Energy’s closing price of $67.54 a share yesterday and still get the company for less relative to earnings than any coal takeover in the past year, data compiled by Bloomberg show.

“Now is the opportune time for a buyer to potentially start looking at them,” J. Christopher Haberlin, a Richmond, Virginia-based analyst at Davenport & Co., said in a telephone interview. “It’s some of the best coal in the world and it’s what steelmakers want. If somebody did make a run at Walter here, certainly they could take Walter out a price much lower than where that valuation may have been.”

Walter Energy may attract interest from BHP Billiton Ltd., Anglo American Plc or ArcelorMittal, and could command as much as $120 a share in an acquisition, he said.

Today’s Trading

Paul Blalock, a spokesman for Birmingham, Alabama-based Walter Energy, declined to comment.

Kelly Quirke, a spokeswoman at BHP, declined to comment on whether the Melbourne-based company is considering a bid for Walter Energy, as did James Wyatt-Tilby, a spokesman for Anglo American of London. Giles Read of Luxembourg-based ArcelorMittal didn’t immediately respond to a telephone call or an e-mail seeking comment outside normal business hours.

Walter Energy advanced as much as 5.4 percent today before closing 3.9 percent higher at $70.14 in New York. The shares fell 45 percent in the past year through yesterday, the biggest drop in the 34-stock Bloomberg World Coal Index apart from two companies -- Alpha Natural Resources Inc. and Arch Coal Inc., the data show.

Earnings Miss

Most of the decline came after Walter Energy completed its biggest ever acquisition with its purchase of Western Coal, as Keith Calder quit as chief executive officer in June after three months on the job and the company’s earnings fell short of analysts’ projections.

Walter Energy plummeted 30 percent on Aug. 4, its biggest drop since at least March 1995, after second-quarter revenue and net income trailed estimates.

The company’s fourth-quarter profit forecast in November also missed analysts’ projections after it suffered a more than 40 percent decline in third-quarter earnings. This month, Walter Energy cut its coal production forecast for 2012.

The share-price slump, which erased $2.3 billion in Walter Energy’s market capitalization in the past year and left it with a value of $4.2 billion yesterday, pushed down its valuation and increased speculation it could be vulnerable to a takeover.

Relative Value

At 9.3 times earnings, Walter Energy was valued at a 33 percent discount to the industry average for North American coal mining companies, data compiled by Bloomberg show. Walter Energy also traded at 1.7 times its assets minus liabilities earlier this month, about half its valuation in August.

While Walter Energy’s stock has fallen, its coal is considered better quality because it’s purer and has a so-called higher heat rate, making it desirable for steelmakers that use it to forge the alloy, according to T. Rowe Price Group Inc.

Walter Energy, which has operations in Alabama’s Blue Creek seam and added mines in Canada when it bought Vancouver-based Western Coal, sold its coal for a price of $223 per ton in the third quarter, according to data compiled by Bloomberg.

That’s more than any U.S. coal producer and three times the average price for the industry, the data show.

With prices for steelmaking coal close to “bottoming,” according to an estimate from Raymond James Financial Inc., Walter Energy makes sense as an acquisition target, said Lucas Pipes, a New York-based analyst at Brean Murray.

‘No Question’

“There’s no question that folks always have M&A in the back of their minds with Walter,” he said in a telephone interview. “They do have high quality met coal reserves and at least over the last couple of years have enjoyed pretty healthy prices. Walter’s reserves definitely hit the parameters in terms of what potential buyers are looking for.”

BHP Billiton, the world’s biggest mining company, and Anglo American, which mines for coal, iron ore and diamonds, could gain Walter Energy’s mines in Alabama and western Canada, which are near ports and can help any buyer cut the cost to ship coal to South America, Europe and Asia, Davenport’s Haberlin said.

Buying Walter Energy would also help ArcelorMittal, the world’s largest steelmaker, reduce the amount of coal it needs to purchase from suppliers, according to Malcolm Polley, who oversees $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania.

“It would help ArcelorMittal in terms of becoming a more vertically integrated producer of steel,” he said. “You want to do it in the case of ArcelorMittal because you want to lock in a reasonable cost for your met coal.”

‘Would Emerge’

While Davenport’s Haberlin estimates that Walter Energy could command a takeover premium of more than 75 percent, doubling yesterday’s price to $135 a share would value the company at 14 times its earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show.

That would still be cheaper than any billion-dollar coal acquisition last year, when a record $28 billion in company takeovers were announced in the industry, the data show.

Walter Energy is an “attractive acquisition,” said Davenport’s Haberlin. “They do have very good quality coal. It would be a major global miner or a global steel company that would emerge as the bidder.”

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