Cleveland-Cliffs and Alpha Natural Resources to Merge
07/17/2008 - Cleveland-Cliffs and Alpha Natural Resources announce a definitive merger agreement in which Cleveland-Cliffs will acquire all outstanding shares of Alpha in a cash and stock transaction valued at approximately $10 billion.
Cleveland-Cliffs Inc and Alpha Natural Resources, Inc. have entered a definitive merger agreement—with the approval of each company’s Board of Directors—in which Cleveland-Cliffs will acquire all outstanding shares of Alpha. The proposed cash and stock transaction is valued at approximately $10 billion.
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The combined company—Cliffs Natural Resources—would become one of the largest U.S. mining companies, positioned as a leading diversified mining and natural resources company. Its mine portfolio would include nine iron ore facilities and more than 60 coal mines located across North America, South America, and Australia.
“Today’s announcement represents a significant strategic milestone for both companies,” said Joseph A. Carrabba, Cleveland-Cliffs’ Chairman, President and CEO. “Cliffs Natural Resources will be positioned as a diversified natural resources company with significant holdings in a variety of important minerals. By combining our companies’ complementary operations and management capabilities, we will be well positioned to meet the world’s increasing demand for raw materials.”
Joseph Carrabba will serve as Chairman and CEO of the combined company, and Alpha’s Michael Quillen will serve as non-executive Vice Chairman. The new company will have two operating divisions—Iron Ore and Coal, which will operate from Cleveland and Abingdon, Va., respectively.
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Under terms of the agreement, Alpha stockholders would receive 0.95 Cleveland-Cliffs common shares and $22.23 in cash for each share of Alpha common stock. Based on Cleveland-Cliffs’ closing stock price on July 15, 2008, Alpha stockholders would receive $128.12 per share, which represents a premium of 35% to Alpha’s closing stock price on July 15, 2008.
The combined company, which is to be renamed Cliffs Natural Resources, would become one of the largest U.S. mining companies and be positioned as a leading diversified mining and natural resources company. Cliffs Natural Resources’ mine portfolio would include nine iron ore facilities and more than 60 coal mines located across North America, South America, and Australia.
Cliffs said the combined company’s enhanced size and scale will enable it to efficiently offer a broad portfolio of various iron ore and metallurgical coal types to meet the growing needs of world steel producers. Cliffs Natural Resources will have a reserve base of approximately one billion tons of iron ore and approximately one billion tons of metallurgical and thermal coal. The company anticipates having an annual sales volume in excess of 30 million tons of iron ore and nearly 18 million tons of metallurgical coal, making it one of the largest suppliers to the world’s steel industry.
The combined company also will enjoy a more diverse revenue stream, which will help it to continue its aggressive growth. In addition to leading positions in iron ore and metallurgical coal, the company will also ship approximately 17 million tons of thermal coal, which is used primarily for electricity generation by utility companies.
Both Cleveland-Cliffs and Alpha bring the same core values to the merger, specifically, the need to protect the occupational health and welfare of every employee by designing and implementing best-in-class safety standards and practices in the workplace. Both companies recognize that the processing of the earth’s mineral resources must be accomplished in a socially responsible manner.
The combined company is also expected to have a strong credit profile, with year-end 2008 pro forma leverage expected to be 1.2x EBITDA. The company expects to generate substantial free cash flow, enabling significant debt reduction and supporting future growth. In 2009, the transaction is expected to be accretive to current analyst expectations for Cleveland-Cliffs.
Cliffs Natural Resources expects to realize annual synergies of at least $200 million beginning in 2010, with the majority being achieved through enhanced coal-processing and blending efficiencies along with elimination of duplicative administrative expenses associated with two public companies.
Transaction Terms—Under terms of the transaction, Cleveland-Cliffs will acquire all of the outstanding common shares of Alpha Natural Resources for aggregate consideration of approximately $10 billion. For each share of Alpha common stock, Alpha stockholders would receive 0.95 Cleveland-Cliffs common shares and $22.23 in cash.
The aggregate consideration comprises $1.7 billion in cash and approximately 71 million new shares of Cleveland-Cliffs common stock. JPMorgan Chase Bank, NA is providing an underwriting commitment for up to $1.9 billion which will be used to finance the transaction. The combined company expects to generate strong operating cash flow which it will use to pay down debt. Upon completion of the transaction, Alpha stockholders would own approximately 40% of the combined company and Cleveland-Cliffs shareholders would own approximately 60%.
Board, Management and Organizational Structure—Following closing of the transaction, Cleveland-Cliffs’ Board of Directors will be expanded by two seats that will be filled by two current Alpha Natural Resources directors, Michael Quillen and Glenn Eisenberg. Joseph Carrabba will serve as Chairman and CEO of the combined company, and Michael Quillen will serve as non-executive Vice Chairman.
Cliffs Natural Resources will have two operating divisions—Iron Ore and Coal. Kevin Crutchfield, currently President of Alpha Natural Resources, will become President of the combined company’s coal businesses. Donald Gallagher, currently Cleveland-Cliffs’ President, North American Business Unit, will become President of the combined company’s iron ore businesses. Cleveland-Cliffs’ Executive Vice President and Chief Financial Officer, Laurie Brlas, will remain Chief Financial Officer of the combined company.
Upon completion of the transaction, Cliffs Natural Resources would have estimated combined pro forma 2008 revenue of nearly $6.5 billion and EBITDA of $1.9 billion. The company’s estimated 2009 revenue would reach $10 billion with estimated EBITDA of $4.7 billion.
Cliffs Natural Resources' world headquarters will be located in Cleveland. The iron ore business will operate from Cleveland and the coal business from Abingdon, Va.
The transaction is subject to approval by Cleveland-Cliffs and Alpha shareholders, as well as the satisfaction of customary closing conditions and regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to close by the end of 2008.
J.P. Morgan Securities Inc. acted as financial advisor to Cleveland-Cliffs Inc and Jones Day acted as legal counsel. Citi acted as financial advisor to Alpha Natural Resources, and Cleary Gottlieb Steen & Hamilton LLP acted as legal counsel.
Headquartered in Cleveland, Ohio, Cleveland-Cliffs Inc. is an international mining company, the largest producer of iron ore pellets in North America and a major supplier of metallurgical coal to the global steelmaking industry. The company operates six iron ore mines in Michigan, Minnesota and Eastern Canada, and three coking coal mines in West Virginia and Alabama. Cliffs also owns 85% of Portman Limited, a large iron ore mining company in Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore. In addition, the company has a 30% interest in the Amapá Project, a Brazilian iron ore project, and a 45% economic interest in the Sonoma Project, an Australian coking and thermal coal project.
Alpha Natural Resources is a leading supplier of high-quality Appalachian coal to the steel industry, electric utilities and other industries. Approximately 89% of the company's reserve base is high Btu coal and 82% is low sulfur, qualities that are in high demand among electric utilities that use steam coal. Alpha is also the nation's largest supplier and exporter of metallurgical coal, a key ingredient in steel manufacturing. Alpha and its subsidiaries currently operate mining complexes in four states, consisting of 57 mines supplying 11 coal preparation and blending plants. The company and its subsidiaries employ more than 3600 people.
