Sherritt stokes the fire

With Fording (FDG-T) shareholders set to vote on their company’s three-way plan to convert to an income trust on Jan. 22, the Sherritt Coal Partnership II has boosted the cash component of its rival $35-per-share bid.

The partnership’s twice-revised bid now caps the cash portion at $965 million, up from $850 million. If all of Fording’s shareholders choose to take cash, each will be limited to about $20 per share plus 0.429 of an exchange right for each of their shares. Under the previous iteration, shareholders would have received $17.63 in cash plus 0.496 of an exchange right.

While the cash portion of Sherritt’s $1.8-billion bid has been increased, the number of exchange rights available to shareholders has fallen to 38.6 million from 42.4 million. If all of Fording shareholders choose to redeem their shares for exchange rights, they would receive about $8.69 in cash plus 0.752 of an exchange right for each share tendered.

“We are offering approximately $225 million more cash to Fording shareholders and we are offering an income trust unit with greater cash flow, lower risk and more value than the Fording-Teck proposal,” Sherritt chairman Ian Delaney said in prepared statement.

The partnership has also increased its estimated cash distribution of $1.05 per unit to $1.14 per unit during the first quarter of 2003 and $1.30 per quarter in 2004, as the number of fully diluted units outstanding under the deal drops to 53.2 million from 57.8 million.

The pair have also put their money where their mouths are doubling to 2 years the period for which their share of quarterly cash distribution would be subordinated. The base subordination level has been increased to $1.30 per unit, subject to the quarterly change in the realized coal price relative to the average realized price for 2003. The maximum subordination level remains at $11.25 million per quarter.

Regulatory approvals for the plan have been received in both Canada and the United States.

The Sherritt Partnership, an alliance of Sherritt International (S-T) and the Ontario Teachers’ Pension Plan, intend to combine certain of Luscar Energy’s metallurgical coal assets and port facilities with Fording’s metallurgical coal and industrial mineral assets. The new entity, Canadian Coal Trust, would be Canada’s largest producer of metallurgical coal.

Luscar is a joint venture between Sherritt, the Ontario Teachers’ Pension Plan, and Consol Energy (CNX-N).

Since its launch back in October, Fording has consistently rejected the partnership’s advances on the basis that the offer “vastly” undervalues its thermal coal assets.

Under Fording’s own plan with Teck Cominco (TEK-T) and Westshore Terminals Income Fund (WTE.u-T), shareholders are offered $34 or one new income trust unit (or a combination of each) for each Fording share tendered.

The trio plan to combine Fording’s coal assets and Teck’s Elkview mine, in British Columbia. Teck’s Bullmoose mine, in the same province and soon to close, is excluded.

The cash limit under the Fording-Teck-Westshore plan is $15.60 plus 0.541 of a unit in a new entity, the Fording Coal Partnership, per share.

Fording’s plan includes a $51-million break-up fee payable to Teck and Westshore. With about 51 million Fording shares outstanding, the dollar-per-share difference between the two offers all but vanishes.

Fording says it will “review the proposed changes to the take over bid” once its receives the formal variation to the offer.

Fording’s chairman, Richard Haskayne, said in a press release, “The fiduciary responsibility of the board is to examine all opportunities to maximize value for shareholders and that includes reviewing this latest proposal.”

“We are conscious of the impending Jan. 22 special meeting and the expiry of the Sherritt offer the following day, and intend to move as quickly as possible to advise shareholders in order to preserve all of their choices,” he added.

Sherritt’s offer is conditional on Fording’s shareholders rejecting their company’s three-way plan, and submitting at least two-thirds of Fording’s outstanding shares to the partnership.

The Sherritt offer expires Jan. 23.

Meanwhile, at the Deltaport facility at Roberts Bank near Vancouver, Westshore Terminals is surveying the damage caused by a windstorm on Jan. 2. Reuters reports that two mechanical ship loaders, about 4 stories high, were toppled by high winds. One of the loaders landed in the water; the other crashed into a ship that was being loaded. A third tower was unaffected. Two people were injured.

Each tower is worth in the neighbourhood of $10-$15 million and will take several months to replace.

Westshore is discussing contingency plans with its customers.

Under Fording’s plan, Westshore would handle the Fording Coal Partnership’s coal under a long-term port services contract at normal commercial terms.

In mid-afternoon trade in Toronto on Jan. 6, Fording’s shares were 53 higher at $33.55; Sherritt’s issue was trading 7 higher at $4.55. Westshore’s units were off 32 or nearly 7% of value at $4.40.