Reports have been around or months that Alpha Natural Resources, Inc. (NYSE: ANR) would acquire Massey Energy Co. (NYSE: MEE). Other suitors were mentioned, but Alpha was always at the top of the list, mainly because produces more metallurgical coal than any other US miner, and Massey, with the largest met coal reserves in the US, seemed to be a logical target.
The companies have finally pulled the trigger on the merger, with Alpha offering 1.025 shares of its stock plus $10/share in cash for Massey. Including debt, the deal is worth a total of about $8.5 billion. Alpha shareholders will end up 54% of the combined company, while Massey shareholders will finish with 46%. The combined company will become the second largest US coal company by market cap, trailing Peabody Energy (NYSE: BTU), but well ahead of third-place Arch Coal Inc. (NYSE: ACI).
Could Massey’s shareholders have gotten a better deal if the company’s board had waited to determine whether or not the market for met coal was going to drive prices to new highs? Following the disaster at Massey’s Upper Big Branch mine in April 2010 which killed 29 miners, the company’s shares fell from high of around $55/share to below $26/share. Massey’s shares closed above $57/share on Friday, about a dollar below the 52-week high.
Massey’s shares have risen steadily since bottoming out in July, and given the demand for met coal, which is used in steelmaking, it’s not a big stretch to believe that the price for Massey’s coal would have continued to rise, pulling the stock price along with it. Over the past year, Massey’s shares have risen nearly 40% and Alpha’s shares are up about 30%. The fatal explosion at Massey’s mine sparked a sharp fall in the company’s shares, but the strength of the company’s reserves pulled the shares back up to where they probably would have been had the explosion never happened.
Massey’s board decided not to wait for further coal price or share price rises, most likely because it probably felt that the company and its shareholders would suffer in the wake of a leadership vacuum brought on by the firing of long-time CEO Don Blankenship. The company’s new CEO, Baxter Phillips, has a career that spans 30 years at Massey, the last 20-years of which he served under Blankenship. He was never more than a caretaker CEO, and the board probably believed that the shorter his term, the better.
Alpha also appears to be a better run company overall. The company posted gross profit of more than $250 million on sales of about $1 billion in the third quarter. Massey had sales of about $810 million and gross profit of just $11 million in the same period. Massey also has about 1,100 more employees and a weaker balance sheet.
There’s plenty of room for improvement in Massey’s operations. Its safety is horrible. Provided that Alpha can reduce costs — and there’s plenty of room to do so — Massey shareholders should see substantial benefits from this deal. Alpha has better management and more careful cost controls. Alpha shareholders get substantial new reserves of high-quality coal at a cost of about $6.50/ton. That’s not bad considering Alpha can sell the stuff for about $300-$350/ton at today’s prices.
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