(Source: PRNewswire)
NEW YORK, July 20 /PRNewswire/ -- Duquesne Capital Management L.L.C. (Duquesne), the largest shareholder of Alpha Natural Resources, Inc. (ANR), has determined to vote against the proposed merger with Foundation Coal Holdings, Inc. (FCL) because Duquesne believes it is against the best long term interests of ANR shareholders. Duquesne is the beneficial owner of 5.9 million shares, which represents more than 8.3% of the outstanding common stock. The merger transaction is scheduled to be voted on by ANR shareholders on July 31, 2009.
Duquesne's decision to vote against the merger was made after two months of detailed financial analysis and discussions with members of the senior management teams of both ANR and FCL in order to evaluate the impact of the proposed merger on ANR and its shareholders. The analysis leads Duquesne to the clear conclusion that the proposed transaction is financially dilutive to ANR shareholders by $10-$15 per share, increases balance sheet risk to ANR via the assumption of FCL's $650 million OPEB/pension liability and $530 million in net financial debt, and reduces financial flexibility via the highly restrictive covenants in FCL bonds. In addition to this financial dilution and these balance sheet risks, in Duquesne's view the transaction is grossly dilutive to ANR's favorable business posture -- its valuable exposure to the international metallurgical and thermal coal markets, and its favorable employee profile. Duquesne sees no advantages to the transaction that can make up for these serious detriments. The basis for Duquesne's conclusions follows.
Duquesne believes the Merger is Highly Dilutive based on Current Metallurgical and Thermal Coal Market Prices as well as their Long Term Outlook
The managements of ANR/FCL provided pro forma 2010 EBITDA guidance of $890mm-$1,000mm. Explicit in their pro forma EBITDA guidance is a projection of FCL EBITDA of $470mm-$530mm and ANR EBITDA of $375mm-$425mm (Roadshow presentation June 2009, Page 21). Based on Duquesne's evaluation, in order to achieve the ANR and FCL stand-alone and pro forma 2010 EBITDA guidance numbers, one must assume $120/ton metallurgical coal, $70/ton Eastern thermal coal, and $10/ton 8400 Powder River Basin (PRB) coal. ANR has asserted, based on their pro forma guidance, that the proposed merger is accretive to EPS and cash flow per share. However, current market prices are $140-$150/ton metallurgical coal, $55/ton Eastern thermal coal and $8.75/ton 8400 PRB coal. As a result, metallurgical coal is performing better than management has assumed, and thermal coal is performing worse than management has assumed. This is important because ANR has significant exposure to international metallurgical and thermal coal markets, while FCL primarily has exposure to domestic thermal coal, mainly in the challenged PRB region. Moreover, in Duquesne's view this disparity is enhanced by the prospect, based on current market dynamics, of substantial upside potential for ANR's stand alone 2010 EBITDA towards $500mm (versus $375mm-$425mm) based on price and volume as compared to the substantial downside risk to FCL's stand alone 2010 EBITDA closer to $300mm (versus $470mm-$530mm) based on price and volume. Hence, the accretion proffered by management as justifying the merger is illusory in Duquesne's view because the actual result will be substantial financial dilution of approximately 1.5 times 2010 EV/EBITDA (closer to 2.0 times when including Pension/OPEB liabilities), approximately 25% dilution on 2010 EPS (post-2010 financial dilution to increase given roll-off of above-market thermal coal hedges), as well as dilution of ANR's asset mix/profile because of the benefit from its stand alone exposure to valuable metallurgical and international thermal coal which is superior to domestic thermal coal from a market perspective. In Duquesne's view, FCL is less valuable with only 1% of its production in metallurgical coal and its asset mix primarily in the PRB region with little exposure to the international seaborne metallurgical and thermal coal markets. Further, managements' accretion analysis simply fails to take into account the substantial Pension/OPEB and financial leverage obligations of FCL with which ANR would be saddled if the proposed merger were approved. For these reasons, Duquesne believes the proposed merger is $10-$15 per share dilutive to ANR shareholders based on 2010 financial metrics, but expects it to be larger in the future based on structural trends.
The following outline summarizes Duquesne's analysis and views:
I.
