Appalachian coal miner Massey Energy Company (MEE) has agreed to merge its resources with Alpha Natural Resources Inc. (ANR) to make good its losses since the deadly coal mining accident that occurred in April 2010.
Massey Energy’s quarterly results have been on the negative side following the deadliest U.S. coal mining disaster in 40 years, at the Upper Big Branch mine in West Virginia, which killed 29 workers. The company has been under scrutiny since the accident, which has impacted the company’s operations.
One of the few reasons for the said merger with Alpha is the company’s losses as well as the ongoing dispute with the federal government regarding the investigations into the accident.
Massey’s agreement to the merger became even more apparent with the departure of Chief Executive Don Blankenship at the end of last year. Blankenship, who led Massey for 20 years, had been a major impediment to the deal with Alpha, stemming from his opposition to selling the company.
Massey and Alpha have agreed to an $8.5 billion stock and cash deal to combine their resources. Under the deal, Alpha will acquire all outstanding shares of Massey for the payment of 1.025 of its own shares and $10.00 in cash for each Massey share. This brings the net price payable by Alpha to $69.33 per share, representing a 21% premium to Massey’s share price as of January 28, 2011.
At closing, Alpha and Massey shareholders will own roughly 54% and 46% of the combined company, respectively. The companies said the deal is expected to close by mid-year 2011. While the boards of directors of both Alpha and Massey have approved the merger, the companies still await shareholder and regulatory approvals.
Following the Alpha-Massey merger will combine some of the world’s largest and highest-quality metallurgical coal reserve bases. The combined company will create about 5 billion tons of coal reserves and more than 110 mines in the U.S. Appalachian region and Wyoming’s Powder River Basin.
Alpha itself has 60 active mines throughout Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming while the largest coal producer in Central Appalachia, Massey Energy, operates about 56 mines in West Virginia, Kentucky and Virginia.
As a result the merged company will benefit from the geographical and asset diversification through the spread of operations and reserves in Central and Northern Appalachia, the Illinois Basin and the Powder River Basin in Wyoming. The combined company is also expected to be America’s largest supplier of metallurgical coal for the world’s steel industry and a highly diversified supplier of thermal coal to electric utilities in the U.S. and overseas.
On the financial front, the new company will have an attractive financial profile with expected 2010 revenues of roughly $6.9 billion and the highest free cash flow generation of any pure-play U.S. coal company. The company will also have a robust balance sheet and a significantly enhanced scale with a combined enterprise value of approximately $15 billion.
Alpha plans to fund the deal with existing cash balances and a newly obtained $3.3 billion financing. The company believes this will be sufficient to finance the cash consideration to Massey’s shareholders and to refinance certain existing Alpha and Massey debt.
Both Massey Energy and Alpha Natural Resources currently hold a Zacks #3 Rank (short term Hold). We retain our long term Neutral ratings on the stocks.
ALPHA NATRL RES (ANR): Free Stock Analysis Report
MASSEY EGY CPY (MEE): Free Stock Analysis Report
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