Alpha Natural Resources and Massey Energy announced at the end of January an $8.5 billion deal where Alpha would acquire all outstanding shares of Massey common stock. The merger would create a coal company with more than 110 mines and combined coal reserves of approximately 5 billion tons, including one of the world’s largest and highest-quality metallurgical coal reserve bases. The new Alpha Natural Resources will, according to the company, be well positioned to capitalize on strong global coal demand trends with a geographically diverse set of assets, including operations and reserves in Central and Northern Appalachia (CAPP and NAPP), the Illinois Basin (IB) and the Powder River Basin (PRB) in Wyoming.
“Together we will be America’s largest supplier of metallurgical coal and a highly diversified supplier of thermal coal,” said Kevin Crutchfield, Alpha’s CEO. “The strategic and operational fit of our two companies is clear and compelling. Together, we are committed to creating a stronger company that has the scale to capitalize on further growth opportunities, succeed in a changing regulatory landscape, and maintain the absolute highest standards in safety and environmental excellence.
“As we demonstrated with the Foundation transaction, we have a proven history of successful integrations since our inception in 2002, and we’ve built a strong track record of creating value through thoughtful strategic growth,” Crutchfield said. “We’re already prepared to launch a seamless integration process, which includes implementing our employee-driven Running Right philosophy of safety and environmental stewardship across the business. This is not just a combination of strong asset portfolios, but a transaction that will empower a combined group of almost 14,000 people with a focus on continued investment in safety, the environment and our communities.”
The new Alpha Natural Resources would have an estimated enterprise value of $15 billion, 75% stock and 25% debt with total liquidity well in excess of $1 billion. Total production on a pro forma basis would be 131 million tons, with more than 25 million tons in export capacity. Among its peers, the new Alpha would be ranked second in market capitalization, second in pro forma earnings, second in overall reserves with significant metallurgical reserves, and third in domestic coal shipments. It would be ranked fourth among global coal suppliers. Combined, the company would have one of the strongest balance sheets with the highest free cash flow generation of any pure play U.S. coal company, Crutchfield explained.
Alpha has a wealth of operating experience in CAPP. Many of the mines and prep plants border each other and are considered highly complementary. As an example, Massey has a low-vol met mine with another under development on the same property as Alpha’s Kepler processing plant. Currently, this coal is washed at Kepler. The cost of keeping it segregated, plus the blending opportunities, are significant. In addition, Alpha has a mine much closer to Massey’s new Marianna plant. “Rather than trucking the coal back to Kepler, we can use the Marianna plant at a significant savings,” Crutchfield said. “The whole Kepler-Marianna scenario could lead to $10 million in annual savings, once fully developed.”
Given the extent of the contiguous operations, the production synergies are also substantial. Massey’s Republic operation is located near Alpha’s PAX operation. Republic could realize a savings of $4/ton in transportation costs, which could result in an annual $8 million savings.
The situation would allow Alpha to “optimize assets” and increase blending and marketing opportunities with met coals in particular. “Combined we expect to ship 24-26 million tons of met coal in the first full year of operation and more than 27 million tons in 2013,” Crutchfield said. “We will have one of the largest met coal reserves in the U.S.”
Alpha’s 2011 PRB coal production is committed and priced. Alpha and Massey have 97% of its eastern thermal coal production committed and priced for 2011. They have 61% of their met production committed and priced for 2011 and 11% committed and priced for 2012. “We are well-positioned for increased met demand,” Crutchfield said. “We are also well-positioned for a turn in thermal markets in 2012 with large positions open in the East and the PRB, 62% and 38% available respectively.”
Recently completing the Foundation merger, integration has become one of Alpha’s core competencies, Crutchfield explained. “One of the key principles is to make sure you have the correct teams involved and the appropriate resources,” Crutchfield said. “We have been careful to anticipate this need to meet milestones and timetables. We have already started integration planning and we will kick it off during February. It will involve managers at all levels in both companies. We hope to complete integration planning prior to closing so they can immediately execute on day one after closing.”
The boards of directors of both companies have each approved the terms of the merger agreement and have recommended their respective stockholders approve the transaction. The transaction is expected to close in mid-2011 and is subject to approval by each company’s stockholders and customary regulatory approvals and closing conditions. Alpha has obtained $3.3 billion in committed financing from Morgan Stanley and Citi which, in addition to existing cash balances, will help fund the deal.
