Luscar bids for Canada’s largest coal miner

Luscar Coal Income Fund has launched a takeover bid for Manalta Coal Income Trust, owner of Manalta Coal, in a $550-million deal that would create North America’s sixth-largest producer.

The takeover is based on the purchase by Luscar of 87 million outstanding instalment receipts of Manalta Coal Income Trust. Luscar is offering 0.335 of a unit in exchange for one Manalta Trust instalment receipt, as well as settle, on behalf of Manalta unit-holders, a $4 payment on each receipt due on Oct. 1. The deal is a blow to Manalta Trust, which last year went public in a $870-million offering based on 87 million units priced at $10 each, payable in instalments of $6 and $4. Manalta Trust instalment receipts were trading at $2.17 on July 22, the day the proposed takeover was announced.

The Luscar offer is based on price of $2.32 per Manalta receipt.

Manalta Coal’s president, George Chapel, says the deal is “opportunistic [and] seeks to take advantage of the instalment receipt structure and the low current trading price of Manalta instalment receipts.” He blames the low trading price on poor coal markets in Japan, and has formed a committee from Manalta’s board of directors to review the proposal.

The deal makes sense, considering the proximity of some of the companies’ operations, according to Gordon Ulrich, president of Luscar. “By combining Luscar and Manalta, we can realize operating efficiencies and position the company for future growth in a way that neither company can achieve on its own or with any other merger partner,” he says.

Manalta owns four mines that adjoin four of Luscar’s operations. Ulrich estimates the merged company would save $70 million between 1999 and 2003 as a result of using equipment more efficiently and eliminating overhead and administrative costs. Annual production is projected at 41 million tonnes, which would make it North America’s sixth-largest producer.

Last year, Manalta produced 27 million tonnes — more than any other company in Canada — from seven mines in Saskatchewan, Alberta and British Columbia.

Luscar produced 14 million tonnes from eight mines in the same provinces.

To cover its takeover tab, Luscar will issue to underwriters $100 million in unsecured debentures convertible into 148.15 Luscar Fund units per $1,000, as well as commit to a bank loan of $300 million. The merged company has secured a $625-million line of credit from several banks, including $125 million in working capital, $200 million in a revolving term facility and $300 million in a non-revolving term facility.

The deal is subject to regulatory approval, and at the acceptance of at least two-thirds of Manalta Trust’s unit-holders by Aug. 18. Should the takeover proceed, Luscar will issue 29 million trust units, plus another 14.8 million trust units should the debentures be converted.