Bloomberg News

Record Coal Premium Turning Into Bargain as Deals Sour: Real M&A

November 01, 2011

Nov. 1 (Bloomberg) -- Even after the biggest wave of coal- mining deals left every buyer this year with losses, a 153-year- old Japanese trading house is betting it can profit by paying the industry’s largest premium for Grande Cache Coal Corp.

Marubeni Corp., with businesses ranging from copper to dress shirts and natural-gas tankers, and China’s Winsway Coking Coal Holdings Ltd. agreed yesterday to acquire the Calgary-based coal producer for C$1 billion ($1 billion). The C$10-a-share offer is more than double Grande Cache’s 20-day average and three times higher than the premium paid by Alpha Natural Resources Inc., which plunged 58 percent after agreeing to buy Massey Energy Co. in this year’s biggest coal deal, according to data compiled by Bloomberg.

While coal takeovers this year have contributed to an average 32 percent slump for bidders, the premium that Marubeni and Winsway are paying still translates into the industry’s cheapest acquisition of 2011 relative to earnings before interest, taxes, depreciation and amortization, the data show. After slowing global economic growth depressed prices for coal used in steelmaking, Chinese demand for metallurgical coal may help Grande Cache report record sales in the next two years.

“It’s a bet on the commodity,” Brandon Blossman, an analyst at Tudor Pickering Holt & Co., an investment bank in Houston specializing in energy, said in a telephone interview. Alpha Natural “acquired Massey at the near-term top of the coal market. We’re now at the bottom of the cycle, so an acquisition isn’t likely to be penalized because everyone is sitting at the bottom of a variety of acquisition metrics,” he said.

Founded in 1858

Ian Bootle, Grande Cache’s chief financial officer, didn’t respond to a telephone call or e-mail seeking comment on the valuation. Kensuke Nishiyama, a spokesman for Marubeni, declined to comment. Winsway didn’t respond to a voicemail outside normal business hours.

Marubeni, the Tokyo-based company founded in 1858 by linen seller Chubei Itoh, and Winsway, the Hong Kong-listed coal importer, agreed yesterday to buy Grande Cache in an all-cash deal that valued the company at a 105 percent premium to its 20- day average, data compiled by Bloomberg show.

Marubeni, which will own 40 percent of Grande Cache, said in a statement today that the deal will “provide Marubeni with a platform for future growth in the coal sector in Canada” and help reduce Japan’s reliance on coal exports from Australia.

Grande Cache, which had retreated 44 percent in 2011 before the deal was announced, surged 68 percent to C$9.87 yesterday.

Record Acquisitions

“At the end of the day, they needed a premium that they could sell to shareholders,” Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “This is what it takes to get the deal done, and presumably, once they have the asset, they’re going to generate returns.”

The agreement added to the record pace of dealmaking in the coal industry, in which $23 billion in takeovers have been announced this year, data compiled by Bloomberg show.

While the takeover premium for Grande Cache was triple the 34 percent average for billion-dollar industry deals this year, Marubeni and Winsway are still getting the company for a lower price relative to earnings.

The two companies are paying 17.6 times Grande Cache’s reported Ebitda, less than all other coal companies acquired in deals worth more than $1 billion this year and a 30 percent discount to the 25.2 times Ebitda that Abingdon, Virginia-based Alpha Natural agreed to spend for Massey in the richest takeover in the industry, according to data compiled by Bloomberg.

‘A Good Sign’

Since the Massey takeover was announced in January, shares of Alpha Natural have fallen more than all but two companies in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity. The deal has contributed to almost all of Alpha Natural’s 60 percent drop this year, the data show.

Overall, the six buyers involved in the four previous coal- mining acquisitions worth more than $1 billion in 2011 have on average lost about a third of their market value this year.

“Equity prices are pretty low,” Rick de los Reyes, who manages $800 million at T. Rowe Price Group Inc.’s Global Metals and Mining Fund in Baltimore, said in a telephone interview. “The fact that somebody is willing to step in and buy at this point is a good sign.”

The coal takeovers have failed to lift the shares of acquirers as prices of the raw material peaked this year.

After climbing 47 percent to a record $330 a metric ton in the second quarter from the previous three-month period as coal demand in China jumped and floods in Queensland, Australia constrained production, prices have since dropped 14 percent to $285 a ton this quarter, data compiled by Bloomberg show.

‘Natural Market’

Hard coking coal prices will average $250 a ton in the next two years before falling further to $235 in 2014, according to an Oct. 4 report from Zurich-based Credit Suisse Group AG.

While prices are projected to decline, Grande Cache is “especially attractive” to Japanese trading houses such as Marubeni because Japan, China and South Korea are the “natural market” for metallurgical coal from Canada’s west coast, said Meredith Bandy, a Denver-based analyst at BMO Capital Markets.

Grande Cache, which ships its coal from Vancouver, manages a mine that produces coking coal and holds leases covering 22,000 hectares (54,363 acres). Its assets, in west-central Alberta’s Smoky River Coalfield, contain an estimated 346 million tonnes of coal resources, its statement yesterday said.

Grande Cache’s sales will increase 80 percent to a record of C$481.8 million in the fiscal year ending in March and another 25 percent the year after that, according to analysts’ estimates compiled by Bloomberg.

Deals such as Alpha Natural’s acquisition “were all done right before the market fell out of bed,” BMO Capital’s Bandy said in a telephone interview. Marubeni and Winsway “might be paying a better price and it’s possible they’ll end up getting better value out of the assets,” she said.

--With assistance from Simon Casey and Sonja Elmquist in New York, Liezel Hill in Toronto and Yuriy Humber in Tokyo. Editors: Michael Tsang, Daniel Hauck.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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