Western, Walter in $3.3B merger

VANCOUVER — Two weeks of intense negotiations and due diligence between Western Coal (WTN-T) and Walter Energy (WLT-N) has produced a formal $3.3-billion agreement to merge the two companies and create a leading metallurgical coal producer.

The key terms of the deal are the same as those outlined in a merger proposal released Nov. 18 that established an exclusivity agreement between the companies.

Walter Energy will pay $11.50 in cash or 0.114 of a share for each of the roughly 278 million Western shares, fully diluted, that Walter does not already own. With Western Coal receiving a mix of shares and cash, Walter expects to pay out $2.1 billion in cash and roughly 9 million shares. The price represents a 56% premium to Western’s closing share price of $7.38, the day before the proposal was first released.

The deal is expected to add to Walter’s earnings per share within the first year after the transaction closes.

“This is the best deal in the coal business in a long long time,” said Joseph Leonard, interim CEO of Walter, in a conference call. “We just view this as a dynamite combination.”

The companies are touting the strong synergies to be realized between them, especially geographically. Vancouver-based Western’s coal operations are in northeastern British Columbia, West Virginia and South Wales, while Tampa, Fla.,-based Walter’s operations are in the Appalachians.

The geographic spread of the resources means the combined company will be well-situated to supply metallurgical coal to the fast growing markets of India, China and Brazil while continuing to provide supplies for Europe and the United States.

“This transaction creates a bigger, stronger company with true diversification,” commented Leonard.

The combined company will have roughly 385 million tons of metallurgical coal reserves, with established growth potential.

Western CEO Keith Calder said in the conference call that world steel production is expected to grow by 50% in the next 10 years and the combined company will help meet the increased demand by ramping up production by 45% in the next few years.

“Our production growth is well-defined, well understood and is within our grasp,” said Calder.

Western expects to produce 6.1 million tonnes of coal for the fiscal year ending March 31, 2011, and plans to increase annual production to 10 million tonnes by fiscal 2013. Walter, similarly, expects to produce 6.6 million tonnes of coal in 2010 and plans to grow production to 8.6 million tonnes annually by 2012.

The deal also comes at a time of resurgent prices for metallurgical coal as China becomes a net importer and demand continues to grow elsewhere. Western Coal realized a 41% increase in its consolidated average coal price this year, from $120 per tonne to $169 per tonne, while the first quarter benchmark metallurgical coal price was US$225 per tonne.

The companies do not expect to complete the merger until the second quarter of 2011 due to the size and complexity of the deal. Indeed, the companies were not able to meet the original timeline for reaching the arrangement agreement, and had been forced to extend the exclusivity deadline.

Of the two weeks of negotiations, Leonard said in the conference call: “If you’re a shareholder of either company you should be well assured that management teams gave you your money’s worth in the past 14 days. There hasn’t been much sleep either in Vancouver or Tampa or Birmingham.”

Walter Energy will continue to list on the New York Stock Exchange and will apply for a listing on the Toronto Stock Exchange. Western Coal will nominate three directors to the Walter board, while the senior management profile has not been announced. The exact location of a headquarters has also not yet been determined, but it will be in the United States.

Western’s share price climbed $1.30 or 12.6% to pass the buying price and end at $11.60 on 62.3 million shares traded. The company was trading at a 52-week low of $2.02 last December and was trading at $3.50 as recently as late August. Western earned $40.8 million in the quarter ending Sept. 30, compared with $2.2 million a year earlier, while coal production increased 90% year-over-year.