Cleveland-Cliffs to buy Alpha Natural for $8.3 bln
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By Euan RochaNEW YORK (Reuters) - Iron ore pellet maker Cleveland-Cliffs Inc on Wednesday said it agreed to acquire coal miner Alpha Natural Resources Inc for about $8.3 billion, expanding its coal assets and positioning itself to capitalize on the boom in the global steel industry.Alpha mines vast amounts of metallurgical coal, which is used primarily to make coke, a key component in steelmaking. It also produces steam coal, used mainly by utilities as fuel for electricity generation.The combined company, which would be named Cliffs Natural Resources, would be the largest North American producer of metallurgical coal, with more than 60 mines located across North America, South America and Australia, the companies said on Wednesday."This merger will make us the largest iron ore and metallurgical coal producer in the U.S., allowing us to meet the growing needs of global steel makers," Cleveland-Cliffs Chief Executive Officer Joseph Carrabba told Wall Street analysts on a conference call.The combined company expects 2009 revenue of $10 billion and earnings before interest, taxes, depreciation and amortization (EBITDA) of $4.7 billion. On a stand-alone basis, analysts had forecast 2009 EBITDA for Cleveland-Cliffs and Alpha of $2.3 billion and $1.1 billion, respectively."This is a good strategic fit for Cleveland-Cliffs, as it gives them a stronger presence in the very tight metallurgical coal market and complements their iron ore business," said Brian Hicks, co-manager of U.S. Global Investors Inc's Global Resources Fund, which owns stock in both companies."Longer-term this consolidation may make Cliffs an even more attractive target for a steel producer looking to vertically integrate their operations."Stockholders of Alpha, an Appalachian coal producer, would receive 0.95 Cleveland-Cliffs share and $22.23 cash for each of their shares.Based on closing stock prices on Tuesday, the deal values Alpha at $128.12 per share, a premium of 35 percent, the companies said in a statement.However, following the deal's announcement, shares of Cleveland-Cliffs fell about 9.5 percent to $100.84; at this level the deal values Alpha's shares at $118.03, about a 24 percent premium to Alpha's closing share price on Tuesday. Shares of Alpha Natural rose 11 percent to $105.93 in afternoon trade on the New York Stock Exchange.Cleveland-Cliffs expects to pay about $1.7 billion in cash and about 71 million new shares of common stock. On closing, Alpha shareholders would own about 40 percent of the combined company, while Cleveland-Cliffs shareholders would own about 60 percent.The boards of both companies have approved the deal, which is expected to close by year's end.JPMorgan Chase Bank is providing an underwriting commitment for up to $1.9 billion to finance the deal.Analyst David MacGregor of Longbow Research said financing does not appear to be a concern, but some investors may have sold Cleveland-Cliffs stock because they had expected the company to be acquired rather than be an acquirer."But now they have bought Alpha and it doesn't look like a steelmaker like Mittal (ArcelorMittal ) will step in to break up the deal."Cliffs Natural Resources expects to realize annual savings of at least $200 million beginning in 2010, mostly through enhanced coal processing and blending efficiencies.The combined company would have a reserve base of about 1 billion tons of iron ore and about 1 billion tons of metallurgical and thermal coal, with annual sales volume of over 30 million tons of iron ore and nearly 18 million tons of metallurgical coal. It would ship about 17 million tons of thermal coal annually.Carrabba said he does not ignore the possibility of a global slowdown, but he remains bullish in the long term on metallurgical coal markets."We are quite comfortable acquiring their thermal coal assets too; it is good for balancing our diversification. No one wants to put all their eggs in one basket," said Carrabba.Cleveland-Cliffs, which is the largest North American producer of iron ore pellets that feed into the integrated steel industry, has benefited from the spike in global steel prices. Earlier this month it announced plans to expand two mines in Michigan and also sharply raised its iron ore pricing outlook for 2008.Carrabba would serve as chairman and chief executive of the combined company, which would be based in Cleveland.JPMorgan advised Cleveland-Cliffs on the deal, while Citigroup acted on behalf of Alpha.(Additional reporting by Steve James; Editing by John Wallace and Gerald E. McCormick)(For more M&A news and our DealZone blog, go to http://www.reuters.com/investing/news/mergers)
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