Fording battle ends in peace (January 13, 2003)

The heated battle for Fording (FDG-T) has ended with a truce that will see the two sides combine their respective metallurgical coal assets under the Fording Canadian Coal Trust banner.

The Sherritt Coal Partnership II, an alliance of Sherritt International (S-T) and the Ontario Teachers’ Pension Plan, has agreed to merge its metallurgical coal assets with those of former foes Fording and Teck Cominco (TEK-T).

Under the plan of arrangement, Fording shareholders are offered $35 or one unit in the new trust, or a combination of the two, for each of their Fording shares. The limit on the cash portion of the new deal is $1.05 billion. A maximum of 21.4 million Fording Trust units are available.

If all of Fording’s shareholders go for the cash each will receive $21.75 plus 0.379 of Fording Trust unit for each share tendered. In addition to regular cash payouts, acquiescing shareholders would also get a special cash distribution of $1.48 per unit.

Under a complex transaction, the Fording Canadian Coal Trust would hold an initial 65% interest in a coal partnership that would hold the metallurgical coal assets of Fording, Teck Cominco, and the Luscar Energy Partnership. The Trust will also hold all of Fording’s industrial minerals business.

Teck Cominco’s contribution would include its Elkview mine in B.C., plus $125 million in cash for an initial 35% interest in the partnership. Teck will act as manager of the coal partnership and could boost its stake in the partnership to 40% over four years, but only if the partnership reaches performance goals.

Teck Cominco and Westshore Terminals (WTE.u-T) will each invest $150 million in Fording Trust units. As under Fording’s previous three-way plan, Westshore will handle the trust’s coal under a long-term port services contract at commercial terms.

Under the new deal, Teck cannot exchange its interest in the coal partnership into Fording Trust units.

Luscar, a joint venture among Sherritt, the Ontario Teachers’ Pension Plan, and Consol Energy (CNX-N) will chip in their Line Creek mine in B.C., and the Luscar mine and undeveloped Cheviot deposit in Alberta, plus a 46.4% interest in Neptune Bulk Terminals, North America’s largest multi-product bulk terminal. The Sherritt Partnership will also invest $375 million in cash into the Trust; $275 million would come from the Teachers’ Pension Plan.

The plan also calls for the Sherritt Partnership to buy all of Fording’s thermal coal operations and assets for $225 million. The Fording Trust will retain a royalty, capped at 5% of gross revenue, on production from certain of the properties.

Lastly, Fording has agreed to pay the expenses, to a maximum of $75 million, racked up by Teck, Westshore and the Sherritt Partnership during formation of the new trust.

In the end, the Fording Canadian Coal Trust would be owned 38.6% by current Fording shareholders, 22.7% by the Sherritt Coal Partnership II, 9.1 % by each of Teck Cominco and Westshore Terminals, 7.7% by the Teachers’ Pension Plan and 6.8% by each of Luscar and Consol Energy.

Fording Trust is expected to have pro forma consolidated capitalization of about $2 billion, including pro forma consolidated debt of around $336 million, before working capital. Fording’s existing foreign exchange hedge contracts will remain in place.

The coal partnership would be the world’s second largest metallurgical coal company accounting for about 20% of the world’s high-quality metallurgical coal. Sales for 2003 are pegged at 25 million tonnes.

To allow the new deal to go through, the Sherritt Partnership has agreed to withdraw its recent sweetened offer for Fording, and return all tendered shares. A $51-million break-up fee due to Teck and Westshore has also been waived.

Fording’s board has given the plan the thumbs up and recommends it to its shareholders. The new deal still requires shareholder and court approvals. A shareholder vote will soon be scheduled.

Fording shares ended the Jan. 13 trading session 14 lower at $33.65 in Toronto. Sherritt shares were 30 higher at $4.80; Teck’s B class finished 50 richer at $12.50, and Westshore was 37 higher at $5.