Coal producers Alpha Natural Resources, Inc. (ANR) and Foundation Coal Holdings, Inc. (FCL) Tuesday announced the signing of a definitive agreement, under which the two companies will merge in an all-stock transaction valued at approximately $2 billion. The combined company, which will retain the Alpha name and will be headquartered in Abingdon, Virginia, would have an equity market capitalization of $3.5 billion and enterprise value of $4 billion as of today's announcement. The transaction is expected to be completed later this year.
Under the terms of the deal, Foundation stockholders will receive 1.084 shares of the new company for each share of Foundation. Each share of Alpha will automatically become one share of the combined company. Based on the closing share price of Alpha on May 8, consideration received by Foundation stockholders has been valued at $32.73 per share. This will result in Foundation stockholders owning approximately 41% and Alpha stockholders owning approximately 59% of the new company on a fully diluted basis.
The exchange ratio is calculated as a 37% premium over the 5-day average closing price of Foundation shares ended on May 8, relative to the 5-day average closing price of Alpha shares during the same period.
The aggregate consideration comprises approximately 50 million new shares of the new company's common stock and the assumption of approximately $530 million of Foundation's net debt.
In connection with the transaction, Alpha said it will use cash on hand to repay its existing senior secured credit facility, preserve its 2.375% convertible senior notes, and seek to upsize its $85 million accounts receivable securitization facility. Foundation's $298 million 7.25% senior notes and its senior secured credit facility will remain outstanding. Alpha and Foundation have agreed to seek amendments to Foundation's existing credit agreements and bond indentures. However, consummation of the merger is not conditioned on such amendments being obtained or subject to any other financing contingency.
Alpha and Foundation said that both companies' boards of directors have unanimously approved the terms of the deal and have recommended the companies' stockholders to approve the transaction.
Alpha, one of the leading Eastern coal producers and the nation's largest supplier of metallurgical coal to the steel industry, operates 50 mines and 10 coal preparation plants in four states. About 88% of the company's reserve base is high Btu coal and 83% is low sulfur. Alpha and its subsidiaries employ more than 3,600 people.
For the recently concluded first quarter, Alpha reported a surge in its earnings despite a decrease in revenues and a sluggish demand environment. The company's net income was $41 million, or $0.58 per share, compared with $25.5 million, or $0.39 per share, a year ago. Total revenues declined to $486.74 million from $493 million last year.
In November last year, mining company Cliffs Natural Resources Inc. (CLF) terminated a definitive merger agreement with Alpha amid various issues, including the challenging macroeconomic environment and the uncertainty in the steel industry. Cliffs initially offered about $10 billion in cash and stock to Alpha, but the financial turmoil and fluctuating commodity prices brought down the deal price to around $2.9 billion.
Foundation is a diversified producer of thermal coal used by electric utilities, with 9 active mines, 4 preparation plants and coal reserves in Northern Appalachia, the Powder River Basin and Central Appalachia as well as reserves in the Illinois Basin. Foundation Coal, with about 3,000 employees, produces approximately 70 million tons of coal annually.
Foundation recently reported a loss for the first quarter primarily due to a decline in revenues as a result of lower Northern Appalachian shipments compared with last year. The Linthicum Heights, Maryland-based company's net loss was $4.5 million, or $0.10 per share, compared with net income of $6.2 million, or $0.13 per share, a year ago. Revenues declined to $405.7 million from $412.3 million in the comparable quarter last year.
Alpha and Foundation said that the combined company will be the third-largest coal producer in the U.S., with 2008 pro forma revenues of $4.2 billion. Alpha and Foundation together operate 59 coal mines and 14 preparation plants. The combination will have coal reserves of more than 2.3 billion tons. Total liquidity is expected to be approximately $750 million.
Further, the combined company expects to generate substantial free cash flow in 2009 and 2010, which will facilitate debt reduction and support future growth initiatives. In addition, it is expected to realize approximately $45 million in annual revenue and cost savings through administrative, sales and operating synergies beginning in 2010.
Alpha and Foundation also said that the transaction, based on management's current outlook for the pro forma company in 2010, is expected to be accretive to both adjusted diluted earnings per share and cash flow earnings per share in 2010. The new company will continue to trade on the New York Stock Exchange under Alpha's current ticker symbol ANR.
The combined company's board will consist of six directors from Alpha and four directors from Foundation. Upon completion of the merger, Alpha's chairman and chief executive officer Michael Quillen will become chairman of the combined company. Kevin Crutchfield, currently Alpha's president, will become chief executive officer of the combined company, and Kurt Kost, Foundation's president and chief operating officer, will become president of the combined company. Further, James Roberts, Foundation's chairman and chief executive officer, will become a member of the combined company's board.
Alpha is being advised by Citi and its legal counsel is Cleary Gottlieb Steen & Hamilton LLP. Barclays Capital Inc. is the financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP is the legal counsel for Foundation.
Among others in the sector, Arch Coal, Inc. (ACI) announced earlier that it has agreed to buy Jacobs Ranch mine in the Powder River Basin of Wyoming from UK-based mining giant Rio Tinto (RTP, RIO.L, RIO.AX) for a total cash consideration of US$761 million.
Another peer Peabody Energy Corp. (BTU) has announced a renegotiated agreement with Polo Resources Ltd. to form a 50-50 joint venture holding with Polo Resources' Mongolian coal interests, for a cash contribution of up to $25.8 million. The option agreement replaced the agreement announced in January 2009.
ANR closed Monday's trading at $28.86, down $1.33, on a volume of 3.14 million shares.
FCL dropped $0.90 and ended Monday's trading at $23.24, on a volume of 2.09 million shares.
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