May 27, 2024

DealBook: Arch Coal to Buy International Coal for $3.4 Billion

6:40 p.m. | Updated
Arch Coal said on Monday that it would buy the International Coal Group for $3.4 billion in cash, creating one of the world’s largest coal producers.

The deal is largely a bet on steel: the combined company would be the second-biggest producer of metallurgical coal in the United States at a time when prices for such steel-making coal are rising thanks to demand from China and India. The biggest producer of steel-making coal is Alpha Natural Resources, which outbid Arch Coal earlier this year to acquire Massey Energy for $7.1 billion in cash and stock.

The deal is also something of a vindication for Wilbur L. Ross Jr., who founded International Coal. The investor, known for his willingness to plunge into distressed industries, acquired assets out of bankruptcy from the mining company Horizon Natural Resources in 2004. From that, he cobbled together International Coal from a series of acquisitions. The company went public in December 2005 at $11 a share. Mr. Ross holds a 6 percent of the company, having halved his stake late last year.

Arch is offering $14.60 for every International Coal share, a premium of 32 percent to I.C.G.’s closing stock price on Friday.

Shares of International Coal surged 30.7 percent on Monday, closing at $14.42. Arch Coal fell 2.2 percent, to $33.53.

International Coal’s stock price had been rising after Alpha Natural’s deal for Massey spurred speculation that it would be next.

“International Coal had been the subject of much speculation in the coal industry trade press of whether it would be the next M. A. target, with Arch typically featured as a likely suitor,” analysts at Stifel Nicolaus said in a note on Monday.
The combined Arch-International Coal would have annual revenue of $4.3 billion on shipments of 179 million tons of coal — both thermal and steel-producing varieties — and employ about 7,400 people.

Steven F. Leer, chairman of Arch, said the transaction would “extend our operating portfolio into every major U.S. coal-producing basin, and solidify our position as one of the industry’s lowest-cost producers.”

Both boards have approved the tender offer, which is set to commence in mid-May, and 17 percent of International Coal shares are already committed to the deal.

Arch has obtained a bridge loan from Morgan Stanley and PNC, and plans to raise permanent financing by issuing debt and equity.

Arch was advised by Morgan Stanley and the law firm Simpson Thacher Bartlett, while International Coal was advised by UBS and the Jones Day law firm.

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