A Questionable Patriot Bid… (PCX, MEE)

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Patriot Coal Corporation (NYSE: PCX) had a stellar trading day, with a gain of more than 10% which moved the shares above $20.00 for the first time since January 20.  The reason for today’s run was market rumors that Massey Energy Co. (NYSE: MEE) is likely to make a bid for the company.  Wire reports are full of the “no comment” variations from both companies.  Anything is possible in merger land now.  We have seen that.  But what makes the entire exercise questionable today is that Patriot issued a press release after the close today that it was entering into a “receivables securitization program.”  Effectively, this is factoring.  This alone won’t kill any deal, and companies will employ this as one of 20 ways to raise added liquidity.

Patriot said in its press release that it has established a $125 million receivables securitization program. It noted that Fifth Third Bank will be the initial funding source under the program, with a maximum commitment of $75 million, and the company may add additional funding sources in the future.

The company is correct that this will allow more financial flexibility and an ability to maintain low debt levels.  The program will be used primarily to provide for the issuance of letters of credit.  These LOCs will relate to post-mining reclamation, workers’ compensation and retiree healthcare obligations.   Receivables in the program will be subject to customary criteria, limits and reserves.  The purchase commitments under the program expire in March 2013, subject to extensions then with the approval of the funding sources.

We can’t rule out a deal from a predator just because a company plans to securitize receivables.  This is a practice which sometimes is scrutinized heavily by creditors and by analysts and investors who watch the financial health of companies.  The flip-side to the argument against this notion is that it may be cheaper than taking on new debt or credit lines.

Patriot’s market cap is roughly $1.8 billion today and the stock options were very active in the March-2010 CALLS from the $17.50 to $24.00 strike prices with over 32,500 contracts traded in those strike prices.  We do not want too far out on calling a deal questionable when we see this sort of trading activity, particularly when we see 4-times normal volume.  Massey Energy (MEE) even closed up 4.1% at $46.36 and its market cap is $3.95 billion… The market is basically green-lighting the deal before it is known if anything is coming or not.

Patriot is one of the newer coal companies on the stock market which came public in late 2007.  Shares closed up 10.7% today at $20.02.  That is the highest close since this closed at $20.23 on January 20.

JON C. OGG