By acquiring Foundation, which produced 69.4 million tons from 12 mines, Alpha gains access to new market segments, such as Powder River Basin (PRB) production out of Wyoming and longwall mining in southwest Pennsylvania. In fact, two Foundation mines in Wyoming individually produced as much if not more coal than all of Alpha last year. If the deal goes through, and it should, Alpha will be the No. 3 U.S. coal producer with a rather diversified production portfolio.
The deal has several positive attributes. According to the Wall Street Journal, the purchase price is a good deal for Foundation shareholders, which should keep the combined group of shareholders happy. Alpha will be better positioned to withstand future challenges to the industry going forward. The miners at Foundation have transitioned from the Cyprus-AMAX merger in the early 1990s through a Ruhrkohle AG acquisition then to a free-standing publicly held coal company. They may now be able to celebrate future stability as a top-tier U.S. coal producer. Finally, the executives managing the business would be among some of the best in the business: James Roberts, Mike Quillen, Kevin Crutchfield, and Kurt Kost. It’s easy to tell by the tone of the conference calls and the press releases that these guys are excited and they are on the prowl looking for more growth opportunities.
The Alpha deal may be the tip of the iceberg. The U.S. coal industry can probably expect to see further consolidation in the East, where mining costs and regulatory issues are preventing smaller coal operators from posting profits. Several coal operators have been hurt by a decline in demand from both power plants and steel mills during this recession, which makes them attractive take-over targets. As they feel the pinch from being unable access credit, they will likely be acquired by large coal companies.
This is an unusual trend. The U.S. coal industry normally sees the majority of the M&A activity during periods of high demand and high prices. Companies that were looking at these opportunities a year to18 months ago are now seeing the same opportunities at a considerably lower price. Compounding the factor is the entrance of foreign companies with strong cash positions, such as India, Russia (See Mechel Acquires Bluestone, p. xx), China, Korea, etc. Aside from the Arch Coal’s acquisition of Jacobs Ranch last month, this may be the first of more M&A transactions. The last major M&A activity that Coal Age covered was the failed acquisition of Alpha by Cliffs Natural Resources last summer. The eastern U.S. coal market in general and the CAPP region in particular could be ripe for a wave of M&A activity.
Steve Fiscor, Coal Age Editor-In-Chief