Sherritt offers $704M for Royal Utilities

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

Sherritt, which produces nickel, cobalt, electricity and coal, 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, expected to cost at least US$2.1 billion.

On the news, Sherritt shares fell 8%, or $1.31, to $15.10 apiece on a trading volume of 6.4 million shares.

Royal Utilities shares jumped $2.06 to $12.09 on nearly 6 million shares traded. 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, consisting 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 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 overallotment option for an additional 3.9 million shares at the same offering price for 30 days after the closing date, expected to be March 31.

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