February 20, 2013 / 3:20 PM / in 5 years

Hedge fund to launch proxy fight against Walter Energy

(Reuters) - A British hedge fund announced plans on Tuesday to nominate five candidates to the board of Walter Energy Inc WLT.N, saying investors have lost confidence in the metallurgical coal miner’s current board, sending its shares higher.

Walter Energy said it had received the notice of intent from an affiliate of hedge fund Audley Capital Advisors LLP. The company said in a statement it had no contact with Audley aside from the notice of intent.

“Following the acquisition of Western Coal Corp in November 2010, Walter Energy has consistently failed to deliver shareholder value as a result of questionable financial decisions and poor management,” said Audley’s statement.

Walter Energy, which has operations in western Canada, the United States and the United Kingdom, took a $1.1 billion goodwill impairment charge in the third quarter, largely related to the Western Coal deal. It is set to report fourth-quarter earnings on Wednesday after the close.

In recent quarters, weak demand from steelmakers has hit metallurgical or “coking” coal miners’ sales volumes and prices.

“Most of these coal writedowns are market conditions, and almost all the mining acquisitions happen near the top, when you look back. Everyone’s faced similar writedowns,” said Iberia Capital Partners analyst David Beard.

Beard, who rates the company “sector perform,” said proxy battles are difficult to win, but he also said the fight may boost the stock in the short term, reviving takeover rumors that have circulated “forever.”

Audley said the company has fallen short of its earnings guidance, churned through chief executives and relied too heavily on debt financing when it should have issued equity.

The company said it is “committed to creating value for all shareholders through the successful execution of the company’s strategy.”

The date of Walter Energy’s 2013 annual meeting has not yet been set. It currently has 10 board members: nine independent directors, and its chief executive.


Audley is no stranger to Walter Energy - it was a major shareholder in Western Coal. Under a purchase agreement announced in November 2010, Walter Energy was to buy 19.8 percent of Western Coal from the fund.

    Keith Calder, Western Coal’s chief executive, headed up Walter Energy after the acquisition, but he resigned after only three months. The company said then that he had cited “differences of opinion concerning management philosophy.”

    After Calder’s resignation, Audley, which then had a 1.5 percent stake in Walter Energy, urged the miner to sell itself.

    Audley has only a small stake in Walter Energy, according to disclosures included with its release on Tuesday.

    Audley and several people affiliated with the fund are the beneficial owners of 128,500 shares, of which 82,500 are subject to call options. They have also sold put options on 70,000 shares. When it last reported results, the company said it had 62.6 million shares outstanding.

    The company’s major shareholders include J.P. Morgan Asset Management, with a 6.9 percent stake as of December 31, according to Thomson Reuters data, and Harris Associates LP, with a 5.0 percent stake as of December 31. The company’s top 10 investors own just over 40 percent of its outstanding shares.

    In separate statements on Tuesday, Walter Energy announced the retirement of veteran director Howard Clark Jr., effective Monday, and said consultant and former Royal Dutch Shell PLC (RDSa.L) director Nina Henderson would join the board.

    Walter Energy’s shares closed up 5.4 percent at $39.96 on the New York Stock Exchange.

    Reporting by Allison Martell in Toronto; Editing by Gary Hill, Matthew Lewis and Lisa Shumaker

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