Walter Power Agrees to $ 3.3 billion merger of Western Coal as production increases

Walter Energy Inc., a producer of the southern Appalachians carbon steel, agreed to buy Western Canada Coal Corp. for C $ 3,300,000,000 (3.3 billion) to add reserves and increase production of the commodity as prices rise.

Walter Power offered C $ 11.50 per share in cash or 0.114 share Walter Energy companies said today in a joint statement. The agreement, with the unanimous approval of both boards, following a November 18 announcement that they were in exclusive talks.

Mergers and acquisitions in the coal industry are increasing the demand for steel makers in China, the largest producer of the alloy, bidding up prices of raw materials. Prices of coke and steel, coal sold to Asia will rise 8 percent next quarter, according to UBS AG.

"We love coking coal," said Ian Henderson, who manages about $ 7 billion to JPMorgan Chase & Co., including the western part of Carbon. "We were the long-term investors in this particular project, but we think the company was too lowly valued. We do not expect anyone to come in and counter."

Walter previously agreed to pay C $ 630 million for a stake of 19.8 percent in the Western Coal largest shareholder Audley European Opportunities Master Fund Ltd., said on 18 November.

Shares rise

Western Coal rose $ 1.03, or 10 percent to C $ 11.33 in Toronto trading. The shares rose as much as 51 percent on 18 November. Walter Energy rose 84 cents, or 0.8 percent, to $ 106.44 at 9:48 am in the market for New York Stock Exchange.

The offer price is a premium of 26 percent to 20-day average price of coal-based West Vancouver through Nov. 17. This is in line with the average premium rates for the coal industry, announced earlier this year.

"The offer price is a decent premium to where the trade in advance," said Henderson at JPMorgan. "For shareholders is probably the best you can get."

The increased consumption of coal has led to Rio Tinto Group, the world's third largest mining, to team up with Aluminum Corp. of China coking coal projects in China. In the U.S., Massey Energy Co., the largest coal producer in central Appalachia, has received offers from companies like Alpha Natural Resources Inc., two people with knowledge of the case, said last month.

"The outlook for coking coal is good," said Richard Knights, an analyst at Liberum Capital Ltd., by telephone from London. "The picture is all about China's decision to become a net importer."

Funding committed

The total amount of money paid to the holders of Western Coal is expected to be about C $ 2.1 billion, with an estimated 9 million shares to be issued, according to the statement today. Financing of the Offer is fully committed, the companies said.

"This is a transformation event in a time when global demand for metallurgical coal is growing," said Joe Leonard, interim executive director of Tampa, Florida-based Walter Power, in the statement. "The western coal has an attractive high quality asset base of metallurgical coal and has embarked on a strategy of organic growth that is expected to increase the production of more than 60 percent for fiscal year 2013."

Shareholder Audley said other parties, including steel makers were interested in participating Western Coal.

"Walter is the best match because he had a lot of synergies, geographically, in terms of customers and management," said Julian Tregear, managing partner of Audley Capital, in an interview. "It is likely that other shareholders will accept the offer of Walter at the time. In the absence of other alternatives, do not see why not approve."

Treatment Completion

Walter Energy plans to keep its listing on the New York Stock Exchange and will apply to sell shares in Toronto. The company expects the deal to close in the second quarter of 2011. Morgan Stanley is advising Walter, and RBC Capital Markets is advising Western Coal.

"With the strength of their size and financial resources, the combined business will have future growth opportunities that none of us could have in ours," said Keith Calder, president and CEO of Western Coal, in the statement.

The combined entity will have total reserves of coal of about 385 million tons and the world's largest publicly traded "pure-play producer of metallurgical coal, the statement said. The company expects to produce more than 20 million tons in 2021.

"Strategically, this type of attack," said Jim Rollyson, an analyst at Raymond James Financial Inc. in Houston. "I like it. They now have access to Asia did not have before."

Rollyson said restriction of another global economic downturn, prices for metallurgical coal remain strong and the combined company will be able to benefit.

Western Coal will hold a shareholder vote to approve the transaction, the statement said.