Teck Cominco Buys Fording Coal for $14 B

123jump.com Staff
29 Jul, 2008
New York City

Teck Cominco increases its stake in Fording Canadial Coal Trust after it acquires the rest of 60% stake in the metallurgical coal miner that it does not own. The deal values the company at $14 billion and will be financed with a short term debt of $9.8 billion and $1.5 billion in equity offering. The merger of two mining companies is expected to be accretive by the end of the year and increase operating earnings by 50% in 2009.

[R]12:00 PM New York – Teck Cominco acquires total control in Fording Canadian Coal Trust.[/R]

Fording Canadian Coal Trust ((FDG)) surged $6.21 to $88.72 after it agreed to sell to Teck Cominco for $82 in cash and 0.245 Teck Class B subordinate voting share for one unit of Fording.

The deal values the company at $92 per share or $14 billion and at 18% premium to 20-day volume weighted average price of $77.95 per share based on the New York Stock Exchange trading.

Teck Cominco expects the transaction to be effective by the end of October and the transaction enables the company to increase its exposure to non-exchange traded commodities such as metallurgical coal used in steel production. The deal benefits from substantial savings from tax benefits that are likely to expire in 2010.

Tax Savings Drive Deal Rational

Teck Cominco estimates total tax savings after the merger of $3.9 billion in the next 14 months or $22.09 per share which lowers the purchase price to $69.91 per share. After the merger the combined company is expected to generate revenue of $12.13 billion and will have debt to operating earnings ratio of 0.7.

The company estimated combined company with operating earnings in 2009 of $6.87 billion from $4.55 billion for Teck Cominco prior to the merger in the year. After the merger, Teck will increase its holding in Fording Coal Trust to 100% from its current stake of 40%.

Teck will fund the deal with $1.5 billion in stock ( with the issue of 36.9 million new shares ) and $9.8 billion in debt offering and hopes t reduce the debt by 50% in the next 14 months.

Elk Valley Coal is the world’s second largest producer of seaborne hard coking coal used for steel making. Elk Valley Coal produces primarily high quality hard coking coal from its six operating mines in British Columbia and Alberta, Canada which it sells to steel mills mainly in Asia and Europe in addition to North and South America.

Substantially all of Fording’s value is attributable to its principal asset, a royalty paid by its subsidiary, Fording LP, based on cash received from the Elk Valley Coal Partnership. The balance of Fording’s value is attributable to its direct interest in Fording LP, which holds a 60% interest in the Elk Valley Coal Partnership.

The price paid by Teck for the royalty will be treated as a Canadian Development Expense for tax purposes, fully deductible against Teck’s taxable Canadian income using the 30% declining balance method.

Prior to the deal, Teck is the managing partner of Elk Valley Coal and owns a 52% effective interest in the partnership through its 40% direct interest in the partnership and its 19.9% interest in Fording units.