| NEW YORK
NEW YORK In the latest of a wave of coal mining acquisitions, Arch Coal ACI.N will buy International Coal Group Inc (ICO.N) for $3.4 billion to boost its production of steelmaking coal as prices soar on recent global demand.
The deal will make Arch the second-largest U.S. producer of metallurgical coal, almost doubling its production by 2015. It is expected to add to earnings by the start of 2012 and result in annual cost savings of $70 million to $80 million, the companies said on Monday.
"By almost all projections, coal markets are going to be undersupplied for both steam (power-generating thermal coal) and met (metallurgical) coal for the next five years," Arch Chairman and Chief Executive Officer Steven Leer told industry analysts on a call to discuss the deal.
"This really is a deal where two plus two equals five or six, or even seven," he said of the boost it would give the combined company's production capability to exploit high coal prices and demand. Seaborne, or export, metallurgical coal prices have risen about 50 percent in the last year to around $330 per metric ton.
The deal is the latest in the coal industry, following Alpha Natural Resources' ANR.N $6.6 billion plan to buy Massey Energy MEE.N and Walter Energy's WLT.N $3.3 billion agreement to buy Canada's Western Coal.
Arch will pay $14.60 per share for International Coal (ICG), a 32 percent premium to the closing stock price on Friday. The deal is expected to close in the second quarter.
According to Brean Murray Carret & Co, the purchase price is at the upper end of other recent deals, at an enterprise value of around 6.6 times EBITDA (earnings before interest, taxes, depreciation and amortization).
That is higher than what Alpha is paying for Massey or Walter Energy offered for Western Coal. And Arch is buying after ICG's stock had doubled in value over the past year -- far outpacing the 25 percent rise in Arch.
News of the deal sent ICG shares soaring 30.8 percent to $14.43 on the New York Stock Exchange. Arch fell 2.3 percent after Moody's Corp said it might downgrade the company and possibly upgrade ICG.
Antitrust lawyers predicted the deal would win approval, potentially within months.
"I doubt there will be a significant antitrust problem. There will be a close investigation," said Mary Anne Mason, an antitrust expert with Hogan Lovells LLP, who noted both companies had mines in the Illinois basin and central Appalachia. "I cannot see this deal being stopped."
Diana Moss of the American Antitrust Institute said that past consolidation in the market could trigger concern among antitrust regulators, but added there was only a "very slim change of problems that would lead to rejection."
Just last week, Arch had posted a higher-than-expected first-quarter profit and raised its earnings outlook for 2011, targeting increased met coal production to 7.5 million tons in 2011. Now, the combined company will produce some 11 million tons this year, rising to about 15 million tons by 2015.
The combined company will have total annual coal shipments of 179 million tons based on 2010 figures, it said.
"We expect the majority of earnings to ultimately come from the combined company's met coal platforms, and given our positive view on met coal, we view this quite positively," Brean Murray Carret analyst Jeremy Sussman said in a note.
"Adding met coal reserves and business is the sexy thing to do now -- it adds near term profits and given Arch's ownership in DTA (export terminal in Virginia), it makes a lot of sense," said coal trader Frank Kolojeski of New Jersey-based Exporting Commodities International Inc.
About 30 percent of ICG's 1.1 billion tons of reserves are metallurgical coal, giving the combined company a total reserve base of 5.5 billion tons.
According to U.S. International Trade Commission data, U.S. met coal exports were up 50.6 percent to 56.1 million tons in 2010. The trend continued through February, with met coal exports up 21.3 percent so far in 2011.
International Coal, which was founded by billionaire investor Wilbur Ross, is the owner of the Sago mine in West Virginia, where 12 miners died in an accident in 2006.
Arch expects to start its tender offer for International Coal shares around mid-May. Owners of about 17 percent of ICG shares outstanding have agreed to tender their stock in the offer.