Kolkata: Coal India Ltd (CIL) is likely to make a takeover bid for Massey Energy Co., the fourth largest US coal extractor by revenue, which on Monday said it was reviewing strategic alternatives.
New York-listed Massey Energy, which in 2009 produced 36.7 million tonnes of coal, has a market capitalization of $5.16 billion (Rs23,530 crore) at its Monday closing price of $50.52 a share. Its net income in 2009 was $104.4 million on revenue of $2.3 billion.
Several companies, including ArcelorMittal, the world’s largest steelmaker, have shown interest in acquiring Massey Energy, according to recent news reports.
Massey Energy on Monday said in a statement it has retained Perella Weinberg Partners LP and Cravath, Swaine and Moore LLP as financial and legal advisers, respectively, to evaluate strategic options. Massey Energy, which mines coal in three US states—West Virginia, Kentucky and Virginia—had offered to sell some of its assets to CIL. After it completed due diligence exercises for the mines, CIL heard from its investment banker that “the situation at Massey had changed and that the whole company could be on the block”, according to chairman Partha S. Bhattacharyya.
The management of CIL, the world’s largest coal company, has now begun exploring the option of acquiring the Richmond, Virginia-based coal miner.
“It’s going to be expensive, but the cost of not acquiring it, too, could be huge,” Bhattacharyya said. “Also, we have to find a way to gainfully deploy our Rs39,000 crore reserves and the Rs10,000 crore accruing every year.” However, for CIL, the key challenge could be to match the speed of private companies in deciding on a bid. Since it involves a large sum of money, and being a government-owned company, CIL has to be cautious, Bhattacharyya said. “There is empowerment, but for PSUs (public sector undertakings), there are constraints.” Constraints are greater for CIL because it hasn’t dealt with anything like this before. Large acquisitions are indeed difficult for PSUs because they need approvals from the government, and getting them takes time, according to an analyst at consulting firm Ernst and Young, who did not want to be identified.
“Everything depends on whether the government sees the acquisition benefiting the Indian industry,” he said.
“If it does, it may not be difficult for CIL to match the speed of private companies in decision-making.”
Meanwhile, CIL is close to concluding a transaction with Peabody Energy Corp., another US-based coal miner, for jointly operating a mine in Australia. “We are closing the gap,” Bhattacharyya said.
The deal, for which a due diligence exercise has been completed, would give CIL a substantial stake in the mine, and could cost up to $200 million (Rs912.2 crore). Bhattacharyya refused to give any further details, citing a non-disclosure agreement.
Peabody Energy had said in a statement earlier in the year that it and CIL were exploring ways to join forces.
Meanwhile, CIL on Tuesday announced net profit in the six months to September had grown 29% year-on-year (y-o-y) to Rs4,020.36 crore, thanks to an 11% increase in prices introduced in October last year and better realization from electronic auctions of coal.
Revenue grew 16.9% y-o-y to Rs22,525.53 crore even as production remained flat at 185.68 million tonnes.
CIL realized at least Rs1,500 crore more than it did in the same period last year from sales through electronic auction, according to Bhattacharyya. This helped the company expand its Ebitda (earnings before interest, taxes, depreciation and amortization) margin by 408 basis points over the same period last year to 25.75%. One basis point is one hundredth of a percentage point.
Though all its mining subsidiaries missed production targets till September, the CIL management is confident that the company would meet its “financial targets” for the year.
“We had set a steep 7.5% production growth target for the year, and fell short of it by 18.26 million tonnes in the first half,” Bhattacharyya said. “But I am confident that at least two of our subsidiaries would exceed targets, and two more would achieve targets, though with some difficulties.”
CIL produced 431.26 million tonnes of coal last year, most of it thermal coal, which is used by power plants.