Walter to Buy Canadian Company - Analyst Blog

U.S. coal miner Walter Energy Inc. (WLT) has proposed to acquire Canada's Western Coal Corp. for CAD$11.50 per share in a cash and stock deal, with an eye to create a coal behemoth tapping the rising demand from Asian Steel-makers.

Walter Energy has entered into a purchase agreement to buy roughly 54.5 million (19.8%) of the outstanding Western Coal shares owned by affiliate Audley Capital. Walter Energy will pay CAD$11.50 per share or a total consideration of CAD$630 million (USD$615 million) for acquiring Audley's stake in Western Coal.

Under the agreement, Walter Energy will acquire shares from Audley in two parts – first, roughly 25.3 million shares for cash; and then, will acquire the remainder of the stake in cash or stock immediately upon the acquisition of Western Coal by Walter Energy, no later than April 30, 2011.

The total enterprise value of the proposal for Western Coal, including the purchase from Audley Capital, is CAD$3.3 billion (USD$3.2 billion).

With regard to the proposal, the companies have agreed to work exclusively to reach a definitive agreement by December 1, 2010. According to the deal, neither side incurs any penalty in the event of deal failure. A deal is also subject to approval by Western's holders and clearance by regulators.

On successful completion of the deal, Walter expects to have geographically diverse assets in Canada, the U.S. and the U.K. The company expects to become a 'pure-play' metallurgical coal producer with strong market positions in Asia, South and North America and Europe.

The combined company, on a pro forma basis, would have total coal reserves of about 385 million tons. On a stand-alone basis, Walter Energy and Western Coal anticipate a rise in production to 9.5 million tons in 2012 and 11.0 million tons in March 2013, respectively. We expect the merged company to gain from the synergies of elevated production and reserves along with the anticipated strength in the global metallurgical coal markets.

Tampa, Florida-based Walter Energy is one of the leading U.S. producers and exporters of premium metallurgical coal to the global steel industry in the United States. Walter Energy currently produces approximately 7.0 million tons of premium metallurgical coal.

Walter's operating earnings for the third quarter of 2010 came in at $2.57 per share, slightly below the Zacks Consensus Estimate of $2.59 but well above the year-ago earnings of 45 cents per share. We expect the operating earnings for fiscal 2010 and 2011 to be $7.74 and $10.41, respectively.

Walter Energy currently has a short term Zacks #3 Rank (Hold). Its closest peers Arch Coal Inc. (ACI) and Massey Energy Co. (MEE) also carry a Zacks #3 Rank.