Rather than submit to a $1.5-billion takeover bid by the Sherritt Coal Partnership II or attempt to lure competing bids,
On Oct. 21, the Sherritt Partnership, an alliance between
The offer will remain open for 60 days and is subject to at least two-thirds of Fording’s outstanding shares being tendered.
In a press release later that day, Calgary-based Fording said “the offer is 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.”
Fording, Canada’s largest export-coal producer, said it would respond in an appropriate manner should a formal offer be received.
The company says its reorganization plan is not a knee-jerk reaction and that it had been considering the conversion option since earlier this year. A final presentation outlining the plan was presented to the company’s board just prior to the partnership’s announcement.
Fording’s board fully backs the plan, which it says 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 profitable mines, long reserve life, low sustaining capital requirements, expansion potential and relatively stable, long-term cash flow make it 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 has yet to be approved by shareholders, who are expected to vote on it in December, and regulators.
Fording insists the plan is in the best interests of shareholders, and it is therefore not actively pursuing rivals to the partnership’s bid. When pressed on the issue of competing bids, the company maintains its plan is best. The company figures the conversion will allow it to distribute its cash flow to shareholders on a more tax-effective basis than under its current share structure.
Fording mines coal in British Columbia and Alberta and supplies steel makers and electric utilities around the world. The company, along with four others, was spun off from former conglomerate
Fording recently 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 ahead of schedule and posted a net income of $9 million (or 18 per basic share) on revenue of $212.2 million. That’s less than half the year-earlier earnings of $22.3 million (42 per share) on $239.3 million. Fording attributes $8 million of the $13-million decline to the writeoff of accumulated capital costs at the Brooks power project in Alberta.
Third-quarter metallurgical coal sales slid to 2.9 million tonnes from 3.4 million tonnes a year earlier. For the first nine months of 2002, sales volumes amounted to 9.4 million tonnes, compared with 11.6 million tonnes in the corresponding period of 2001.
On average, the company realized US$45 per tonne of its quarterly production, up 7% from a year earlier. For the first three quarters, the company received US$44 per tonne, 13% better than a year earlier.
Earlier this month, Fording beat out the partners’ jointly owned Luscar Energy Partnership for a 5-year contract to operate
Income trust
The Sherritt Partnership’s plan considers combining Luscar’s coal assets with those of Fording to create an income trust. Fording shareholders would receive certificates exchangeable for the units in return for their shares.
Says Sherritt Chairman Ian Delaney: “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.
“Driving our decision 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.
Also, under the proposed acquisition, Sherritt and the Teacher’s Pension would assume around $128 million worth of debt racked up by Fording, bringing the deal’s value to more than $1.6 billion. The Pension Plan already has a 6.2% stake in Fording.
The latest takeover bid is not the partners’ first. Late last year, the two teamed up to acquire Edmonton-based producer Luscar Coal for about $1 billion. The deal gave Sherritt control of 11 coal mines, most of which are steam-coal and lignite producers in western Canada.
During the second quarter, Luscar was instrumental in enabling Sherritt’s coal-generated revenue to more than double to $73.4 million. 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 amounted 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 trading in Toronto; they ended the day a penny lower at $4.11. Fording shares soared $5.50 or more than 21% to $31.49 in heavy action and ended the day at $31.65.
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