Fording circles the wagons

Rather than submit to a $1.5-billion takeover bid by the Sherritt Coal Partnership II, an alliance between Sherritt International (S-T) and the Ontario Teachers’ Pension Plan, Fording Coal (FDG-T) has announced surprise plans to reorganize itself into an income trust.

On Oct. 21, the partnership announced an unsolicited offer of $29 for each of Fording’s 51.3 million outstanding shares. The offer represents a 25% premium over Fording’s average closing price for the 20 days prior to the offer. The shares finished the last trading session before the offer at $25.99. The offer will remain open for 60 days and is subject to at least two-thirds of Fording’s outstanding shares being tendered.

Later that same day, Calgary-based Fording said the offer was, “opportunistic, completely inadequate and fails to reflect the underlying value of the company. We do not believe this offer is in the best interest of Fording’s shareholders.”

The Calgary-based metallurgical coal exporter said it would respond in an appropriate manner should a formal offer be received.

Fording says its reorganization plan isn’t a knee-jerk reaction, but instead the company had been considering the option since earlier this year. A final presentation outlining the scheme was presented to the company’s board just prior to the Coal Partnership’s announcement.

Fording’s board has fully backed the plan and says it is intended to “unlock the value of the significant cash flow generated by the company and to provide an enhanced platform for growth.”

The company believes its highly profitable mines, long reserve life, low sustaining capital requirements, expansion potential and relatively stable, long-term cash flow make a suitable candidate for conversion to an income trust.

Under a plan of arrangement, Fording shareholders would exchange each of their shares for one trust unit. The trust would own all of the company’s shares and subordinated notes. The plan is subject to regulatory and shareholder approval. The company will put the deal to a vote in December.

Fording mines coal in British Columbia and Alberta and supplies steel makers and electric utilities. The company, along with four others, was spun off from former conglomerate Canadian Pacific (CP-T) last October.

Fording has recently twice warned of lower-than-expected third-quarter sales. In July, shipment forecasts were lowered to 15 million tonnes from 15.7 million; another million tonnes were chopped in late September. The decline was attributed to the loss of a contract to Turkish buyers and lower volumes under other contracts.

With the bid announced, Fording released its third-quarter earnings two days earlier than planned and posted a net income of $9 million (or 18 per basic share) on revenue of $212.2 million. That’s well off the year-ago earnings of $22.3 million (42 per share) on $239.3 million.

Fording posted net earnings of $22 million (43 per share) for the second quarter, down from $31 million (59 per share) a year earlier. Revenue slipped to $236 million from $283 million. For the first half, net earnings were $39 million (76 a share) on revenue of $457 million, compared with year-ago earnings of $44 million ( 84 a share) on $526 million. The decrease is attributed to lower metallurgical sales volumes.

Earlier this month, Fording beat out the partner’s jointly owned Luscar Energy Partnership for a 5-year contract to operate TransAlta‘s (TA-T) Whitewood and Highvale mines in west-central Alberta, about 65 km west of Edmonton. The contract calls for about 15 million tonnes of coal to be supplied annually beginning next January. Fording had already been operating the Whitewood mine on a contract basis since 1986.

The Partnership’s plans also included a plan to offer Fording shareholders certificates exchangeable for income fund trust units for all or a portion of their Fording shares.

“We believe that on the metallurgical side of the business there is room for an income trust, which we hope to articulate in the offering circular, which we will publish later this week,” he added.

Also under the proposed acquisition deal, Sherritt and the Teacher’s Pension would assume around $128 million worth of debt racked up by Fording bringing the deals’ value to more than $1.6 billion. The Pension Plan already has a 6.2% stake in Fording.

Sherritt chairman Ian Delaney told the audience of a brief conference call, “Driving our decision here is our expectation that there are large economies to be extracted from combining the assets of our respective coal operations.”

Both companies operate mines in Alberta and British Columbia.

The latest takeover bid isn’t the partners first. Late last year, the two teamed up to acquire Edmonton-based coal producer Luscar Coal for about $1 billion. The deal gave Sherritt control of 11 coal mines, mostly steam-coal and lignite producers in western Canada.

During the second quarter, Luscar helped more than double to $73.4 million Sherritt’s coal generated revenue. Overall, Sherritt posted markedly improved second-quarter net earnings of $24.6 million or 15 per diluted share. For the first half of the year earnings tallied to just under $47 million (28 per share) on revenue of $402 million, compared with a profit of $37.3 million (25 per share) on $261 million in the first half of last year. The coal business contributed $106.1 million in revenue.

Following the takeover news on Oct. 21, shares of Sherritt were off 12 at $4.12 in late trade in Toronto, while Fording shares soared $5.50 or more than 21% to $31.49 in heavy action. On Oct. 22, both shares headed higher. Sherritt regained 7 to $4.18 and Fording climbed another 95 to $32.60 in mid-afternoon trade.