Sherritt offers $704 million for Royal Utilities

Royal Utilities Income Fund (RU.UN-T) shares surged 20% today after Sherritt International (S-T) announced plans to buy out Canada’s largest thermal coal producer for $704 million.

Sherritt says it will use the new cash flow to fund its growth projects. The company plans to spend $2.2 billion alone this year with the majority going towards its 40%-owned Ambatovy nickel laterite project in Madagascar, which is expected to cost at least US$2.1 billion.

Sherritt shares fell 8% today, or $1.31, to $15.10 per share on a trading volume of 6.4 million shares

Royal Utilities shares jumped $2.06 to $12.09 on a trading volume of 5.96 million shares. The company owns Prairie Mines & Royalty, a thermal coal producer, and also holds mineral rights in Alberta and Saskatchewan that generate royalties from coal and potash mining.

Sherritt and the Ontario Teachers’ Pension Plan each hold 41.2% of Royal Utilities while the remaining 17.6% is widely held. The Teachers’ Pension Plan has already entered a lock-up agreement to tender nearly 40.3 million units.

Under the proposed deal, Royal Utilities shareholders would receive $12.25 per unit, which would consist of cash and 0.8033 of a Sherritt share, or a combination of cash and Sherritt shares to a maximum of $225 million in cash.

Assuming the full amount of cash is paid, Sherritt will issue about 31.4 million shares.

Sherritt, which earned $370 million in 2007, expects it will earn extra cash flow from the deal in 2008 and beyond in 2007, Royal Utilities earned $84 million.

Alongside the Royal Utility purchase, Sherritt announced a $400-million bought-deal financing at a price of $15.25 per share for 26.25 million shares.

The financing was co-led by GMP Securities and National Bank Financial and includes Scotia Capital.

Sherritt has granted the underwriters an over-allotment option for an additional 3.9 million shares at the same offering price lasting 30 days after the closing date, which is expected to be March 31.

The net proceeds will be used for general corporate purposes and growth capital expenditures in both Canada and Madagascar.