Walter Energy Inc. is launching a $3.3-billion takeover proposal for Canadian miner Western Coal Corp. , as fast-rising demand from a rapidly industrializing China spurs global competition to secure coal assets.
Florida-based Walter Energy has entered exclusive merger talks with Vancouver's Western Coal in hopes of creating the world's third-largest publicly traded producer of metallurgical coal, used in steelmaking.
Walter Energy's cash-and-share offer is valued at $11.50 a share, a rich 56-per-cent premium to the company's closing share price the day before Thursday's announcement.
If a merger goes ahead, the company will combine Walter Energy's market strength in South America and Europe with Western Coal's muscle in Asia, including China.
Growing infrastructure spending in developing nations is sharply boosting steel demand. The world steel market is expected to grow 50 per cent over the next decade, led by China's huge shift in global demand last year when it began importing coal to make steel used in everything from cars to construction.
The two companies together would have nearly 20 million tonnes of coal capacity by 2012 and the ability to ship into both the Atlantic and Pacific basins. That would put them behind BHP Billiton Ltd. and Vancouver-based Teck Resources Ltd. among publicly traded metallurgical coal producers.
"Given the strategic importance of this business, we had to move decisively, and so we did," Joe Leonard, Walter Energy's interim chief executive officer told investors. "The transaction would … provide new business opportunities which might not be available to either company on a standalone basis," he added. "Walter would be able to reach almost every major steel producer in the world."
Growing demand is also driving up the price of coal, which is now about $210 (U.S.) a tonne for the current quarterly contract, up about 60 per cent from a year ago.
"There is a rush to consolidate metallurgical coal and lock up supply," said Meredith Bandy, coal analyst at BMO Nesbitt Burns. "The general view is the met coal market is tight, and getting tighter."
Part of the consolidation trend is being driven by a friendlier financing market, in particular when compared with the credit crisis during the global financial meltdown more than two years ago.
"The met market is very, very hot and the debt is very, very cheap so you can actually get a deal done," Ms. Bandy said.
There are also fewer assets to buy around the world, with the exception of the United States and Canada.
Western Coal shares closed up 47 per cent to $10.85 on the Toronto Stock Exchange Thursday, which suggests some investors believe the deal may not go through.
Analysts say that's because the deal is not yet definitive, and because of rumours that Walter Energy is itself a takeover target. There is speculation that Walter Energy is making a bid for Western Coal to fend off a possible deal pending for its own company.
Thursday's bid also supports the argument that Ottawa's decision to block BHP's bid for Potash Corp. of Saskatchewan Inc. hasn't slowed foreign takeover proposals in Canada.
"It just goes to show that there's continued demand for Canadian mining assets by international players," said Jason Hornett, a co-lead manager of the Bissett All Canadian Focus Fund at Bissett Investment Management in Calgary, which owns Western Coal shares.
He said the number of mining deals announced in recent months also supports the outlook many investors have that commodity prices will remain strong for the foreseeable future.
Walter Energy also struck a side deal to buy 20 per cent of Western Coal's shares from British hedge fund Audley Capital, after its managing director Julian Treger resigned from the coal miner's board in September.
The departure, which signalled a change in strategy for the hedge fund's holdings in Western Coal, created an opportunity for Walter Energy.
Western Coal has set up a special committee to review the offer and said there is no assurance the negotiations will lead to a deal.