By Jonathan Chen
Takeovers are like Christmas morning for Wall Street. Everyone gets excited and wonders what's next. We could see some consolidation in the coal space, and investors would probably rather have coal in their stockings than a new Transformer or Nerf gun, especially if Walter Energy Inc. (WLT) gets acquired.
The company has been the subject of takeover speculation for quite some time, and now things are starting to get shaken up at the company, after Audley Capital Advisors LLP said the company should explore a sale following the resignation of the CEO. According to data put together by Bloomberg, Walter Energy could be worth as much as $192 per share, based on takeover multiples in the sector.
Chief Executive Officer Keith Calder resigned after three months on the job, and shares have fallen about 15% since April. There is no shortage of potential suitors for the company, including Alpha Natural Resources Inc. (ANR) and Consol Energy Inc. (CNX), according to Raymond James Financial Inc. Davenport & Co. also threw out the idea of a potential steelmaker buying it, since metallurgical coal is used to make steel. Cia. Siderurgica Nacional SA (SID) was mentioned.
It's really an obvious takeout candidate, especially after their CEO resigned,” said Eric Green, a Philadelphia- based fund manager at Penn Capital Management to Bloomberg. “It would be extremely attractive for an international steel or materials company. There's huge demand for met coal, and Walter's is very high quality.
There has also been potential talk of Warren Buffett's Berkshire Hathaway (BRK-B) going after Walter energy, as it is a business simple enough to understand, and meets plenty of his metrics. Bloomberg picked Walter as a potential Berkshire acquisition back in March.
In a letter dated July 17 to the board, Audley Capital, which owns 900,000 shares, wrote the company should be up for sale because of the CEO resignation. The London-based investment firm said the lack of leadership is “weighing on the share price". Calder resigned because of a difference of opinion with the board. He will leave at the end of the month and former interim CEO Joseph B. Leonard will take over.
Shares are gaining ~3% as of the time of this writing, but the real coup de grace could be in a takeover, in which some estimate Walter Energy could be worth as much as $240 a share. This price is using the multiple that Peabody Energy Corp. (BTU) and ArcelorMittal (MT) are offering for Macarthur Coal Ltd. Coal producers have sold for approximately 7.25 times EBITDA since 1998, which would equate to a $192 bid for Walter Energy.
“Now is a good time to sell the company because of the near-record prices for met coal, strong global demand and constricted global supply,” said Davenport's J. Christopher Haberlin to Bloomberg. “The assets have more value now than ever.”
Traders who believe that Walter Energy is likely going to get taken over might want to consider the following trades:
- Go long Walter, as there is going to be a large premium for the stock should it be taken out.
- Look at other potential met coal names, such as Alpha Natural Resources, which has been a takeover target in the past.
- Look for some integrated steel companies which have been rumored to be takeover targets, such as U.S. Steel (X).
Traders who believe that Walter Energy is not going to get sold may consider alternate positions:
- Short Walter Energy, as the uncertainty about the CEO is weighing on shares.