Alpha Natural Resources to combine with Massey Energy

The proposed combination of Alpha Natural Resources (ANR-N) and Massey Energy (MEE-N) announced over the weekend will bring synergies of $150 million annually by 2012 and create a top-three global metallurgical coal producer.

 The new entity will be America’s largest supplier of metallurgical coal for the world’s steel industry and a diversified supplier of thermal coal to electric utilities in the U.S. and overseas.

“Given all the pressures surrounding Central Appalachian operations throughout the industry, consolidating manpower, ideas, mining and transport infrastructure, permits and geology required to effectively compete makes strategic sense in our view,” Michael Dudas and Satyadeep Jain of Jefferies & Company wrote in a research note to clients.  “This much speculated combination apparently withstood competing bids and Massey’s board leaning toward remaining independent.”

The combination will allow Alpha and Massey to benefit from geographical and asset diversification, including operations and reserves in Central and Northern Appalachia, the Illinois Basin and the Powder River Basin in Wyoming. The assets of both companies include more than 110 mines and combined coal reserves of about 5 billion tons, including one of the world’s largest and highest-quality metallurgical coal reserve bases.

The resulting company will have an attractive financial profile with expected pro forma 2010 revenues of about $6.9 billion and the highest free cash flow generation of any pure-play U.S. coal company, a responsible balance sheet, and significantly enhanced scale with a combined enterprise value of about $15 billion.

“No other conceivable combination could create as much in the way of synergies due to the close proximity of our mines, our prep plants, reserve blocks, and the two companies’ deep experience and managerial bench strength in Central Appalachia, none” Kevin Crutchfield, Alpha’s chief executive officer, told analysts and investors on a conference call.  

Under the terms of the agreement, Massey stockholders will receive 1.025 shares of Alpha common stock and $10 in cash for each share of Massey common stock. The proposed deal represents a 21% premium to Massey’s current share price based on Alpha’s closing share price on Jan. 28.

 If shareholders approve the transaction, Alpha and Massey shareholders will own 54% and 46%, respectively, of the combined company.

“Even on a historical basis the combination would be the fourth-largest company globally in terms of total production and the combination would be a solidly number three in met coal sales,” Crutchfield said, adding that he expects the combined entity will ship 24-26 million tonnes of met coal in the first full year and in excess of 27 million tonnes of met coal beginning in 2013.

Crutchfield noted that Alpha has a proven history of successful integrations since the company’s inception in 2002 – in particular its merger with Foundation. In that case, he noted, annual net synergies of $60 million far exceeded the company’s initial estimates of $45 million.

The boards of directors of Alpha and Massey have each approved the terms of the definitive merger agreement and have recommended that their respective stockholders approve the transaction.

The transaction is expected to close in mid-2011 and is subject to approval by each company’s stockholders and customary regulatory approvals and closing conditions.