Western Coal gets merger offer from Walter Energy

Vancouver – A potential merger between Vancouver-based Western Coal (WTN-T) and Walter Energy (WLT-N), a Florida-based coal producer, lifted Western Coal’s share price to new highs even though the deal is far from certain.

The potential partners entered into an exclusivity agreement after Walter proposed a merger that would see Western shareholders receive a mixture of cash and Walter shares worth $11.50 for each Western share held. The proposal values Western at $3.3 billion, based on the company’s 291 million fully diluted outstanding share count, and represents a 55.8% premium to its closing share price the deal before the announcement.

Western and Walter will now work together, exclusively, for two weeks and attempt to reach a definitive agreement. If they cannot reach an agreement the proposal will die without either party incurring any penalties. If they can agree on the terms of a merger during the due diligence period, the move would still be subject to approval from Western shareholders.

The combination would create one of the world’s largest pure-play, publicly-traded producers of metallurgical coal, with assets open pit and underground spread across Canada, the United States, and the United Kingdom and with solid market positions in Asia, South America, North America, and Europe.

Western expects to produce 6.1 million tonnes of coal for the fiscal year ending March 31, 2011, and plans to increase annual production to 10 million tonnes by fiscal 2013. Walters, similarly, expects to produce 6.6 million tonnes of coal in calendar 2010 and plans to grow production to 8.6 million tonnes annually by 2012. For both companies, metallurgical coal constitutes the vast majority of production.

In conjunction with its merger proposal, Walters also arranged to buy, in stages, 54.5 million Western shares from the Canadian company’s largest shareholder, Audley European Opportunities Master Fund. Audley and Walters independently arranged for Walter to buy the shares, which represent 19.8% of Western’s outstanding count, for $11.50 each. Collectively, the sale is worth $630 million.

The shares will be sold in two installments. Walters will immediately purchase 25.3 million shares for cash; the balance will be acquired for cash or Walter stock upon the merger with Western or, in any event, no later than April 30, 2011.

News of the merger proposal added $3.47 to Western’s share price, bringing it to a new 52-week high of $10.85. In late 2009 the company’s shares were worth just $2.02.

But things are significantly changed from a year ago, as Western Coal’s quarterly statements show. The company earned $40.8 million in the three months leading up to September 30, up 18-fold from $2.2 million a year earlier. Those net earnings flowed from quarterly revenues of $220.4 million.

One main cause of the increase is coal production levels, which increased 90% year over year. Last year the company produced 800,000 tonnes of coal in its second quarter; this year it churned out 1.5 million tonnes over the same period.

The other driver of increased profits is the price of coal. This year Western achieved a consolidated average realized coal price of $169 per tonne over the second quarter, up 41% from $120 per tonne last year. Cash costs of production were little changed, dropping 4% to $91 per tonne from $95 per tonne.