Fording battle ends in peace (January 20, 2003)

The heated battle for Calgary-based coal miner Fording (FDG-T) has ended with a truce that would see rival bidders combine their respective metallurgical coal assets under the banner Fording Canadian Coal Trust.

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 will be offered $35 or one unit in the new trust, or a combination of the two, for each share. The limit on the cash portion of the new deal is $1.05 billion. A maximum of 21.4 million Fording Trust units is available.

If all of Fording’s shareholders opt for the cash, each will receive $21.75 plus 0.379 of a 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 — 74 in the first two quarters after the deal closes. The special distribution is designed to make up for the lack of subordination of regular cash distributions, as under the Sherritt partnership’s previous, $1.8-billion offer (T.N.M., Jan. 13-19/03).

Initially the trust is expected to pay out at least 90% of cash flow. No guidance on regular cash distributions was given.

Under a series of transactions, Fording Canadian Coal Trust would initially have a 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 British Columbia plus $125 million in cash for an initial 35% interest in the partnership, which it would manage. Over four years, Teck can boost its stake by 1% for each $10-million incremental increase in “synergies” over $25 million.

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

Teck Cominco and Westshore Terminals (WTE.U-T) will each invest $150 million in Fording Trust units. As under Fording’s previously proposed, 3-way plan, Westshore would handle the trust’s coal under a long-term port services contract at commercial terms.

Line Creek

Luscar, a joint venture consisting of Sherritt, the Ontario Teachers’ Pension Plan and Consol Energy (CNX-N), will chip in its Line Creek mine in British Columbia, together with the Luscar mine and the undeveloped Cheviot deposit, both of which are in Alberta, and 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 in the trust; $275 million of that would come from the Ontario 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 maximum 5% gross revenue royalty on production from certain of the undeveloped properties.

Subject to shareholder approval, Fording has agreed to pay $75 million in expenses racked up by Teck, Westshore (up to $25 million) and the Sherritt Partnership (up to $50 million) relating to the formation of the new trust. Another $25 million will go to Fording to cover merger expenses.

When the dust settles, 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. The units are not subject to a hold or standstill period.

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 trust will be run by James Gardiner, Fording’s chief executive officer, and Fording’s management team.

The coal partnership would trail only BHP Billiton (BHP-N) to rank as the world’s second-largest metallurgical coal company, supplying around 20% of the world’s high-quality metallurgical product. Sales for 2003 are pegged at 25 million tonnes; Fording alone was expecting sales of about 14 million tonnes.

Says Gardiner: “We will essentially own coal mining in Elk Valley, and our mines are close enough and similar enough that we can run them better under one management and operating team.

“It’s early yet to give specific forecasts of potential synergies, but we would expect them to be well in excess of the $50 million from our previously proposed transaction with Teck Cominco and Westshore.”

Breakup fee

To allow the deal to go through, the Sherritt Partnership has agreed to withdraw its recently sweetened offer for Fording and return any tendered shares. A $51-million breakup fee due to Teck and Westshore has also been waived. The new deal comes without a breakup fee.

Fording’s board has given the plan the thumbs-up and recommends it to its shareholders. The courts have yet to approve the deal.

Fording will outline the new plan in more detail in an information circular later in January. A shareholders’ vote is tentatively set for Feb. 19. Fording does not anticipate any anti-trust concerns in Canada or the U.S., and expects to close the deal by the end of February.

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 shares added 37 to make $5.