Arch to buy International Coal for $3.4 billion

Mon May 2, 2011 2:17pm GMT

* Arch to pay 32 pct premium of $14.60/share
* Deal will create No. 2 U.S. metallurgical coal producer
* Int'l Coals shares jump, Arch shares slip
(Adds analyst comments, background, updates shares, bylines)

By Matt Daily and Steve James

NEW YORK, May 2 (Reuters) - Arch Coal (ACI.N: Quote) will buy smaller peer International Coal Group Inc (ICO.N: Quote) for $3.4 billion to create the second-largest U.S. producer of steel-making coal, the companies said on Monday.

The deal is the latest in the coal industry, following Alpha Natural Resources' (ANR.N: Quote) $6.6 billion plan to buy Massey Energy (MEE.N: Quote) and Walter Energy's (WLT.N: Quote) $3.3 billion agreement to buy Canada's Western Coal.

Arch will pay $14.60 per share for International Coal, a 32 percent premium to the closing stock price on Friday. The companies expect the deal to close in the second quarter.

The news sent International Coal's shares soaring 30 percent to $14.39 in early trading on the New York Stock Exchange, while Arch fell 0.2 percent to $34.24.

The deal should benefit Arch Coal over time, particularly as prices for metallurgical, or "met coal," are expected to remain strong because of rising global demand from steel makers.

"We expect the majority of earnings to ultimately come from the combined company's met coal platforms, and given our positive view on met coal, we view this quite positively," Brean Murray Carret & Co analyst Jeremy Sussman said in a note to investors.

U.S. coal exports have risen sharply in the past few months, led by met coal, as world supplies are tight on production problems in Colombia, Australia, South Africa and other countries.

At the same time, environmental concerns have hurt the outlook for domestic U.S. steam coal used in power plants.

The International Coal deal would make Arch one of the top five global coal producers and marketers, with shipments of 179 million tons based on 2010 figures, it said.

About 30 percent of International Coal's 1.1 billion tons of reserves are metallurgical coal, giving the combined company a total reserve base of 5.5 billion tons.

Cost savings from the deal are estimated at $70 million to $80 million per year, the companies said.

International Coal, which was founded by billionaire investor Wilbur Ross, is the owner of the Sago mine in West Virginia, where 12 miners died in an accident in 2006.

Currently, BHP Billiton (BHP.AX: Quote) and Teck Resources (TCKb.TO: Quote) are the global leaders in production of metallurgical coal.

Arch expects to start its tender offer for International Coal shares around mid-May. Owners of about 17 percent of International Coal shares outstanding have agreed to tender their stock in the offer.

Morgan Stanley (MS.N: Quote) is the financial adviser to Arch, and Simpson Thacher & Bartlett LLP provides legal counsel. UBS (UBSN.VX: Quote)(UBS.N: Quote) is acting as the financial adviser to International Coal, and Jones Day is providing legal counsel. (Additional reporting by Bruce Nichols in Houston; Editing by Lisa Von Ahn and Maureen Bavdek), sourced Thomson Reuters)