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Audley Capital Urges Walter Energy Board to Explore Sale
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LONDON and NEW YORK, July 18, 2011 /PRNewswire/ -- Audley Capital Advisors LLP ("Audley"), one of the largest investors in Walter Energy, Inc. and architect of last year's merger with Western Coal, today announced that it has corresponded directly with Walter Energy to share its belief that in the absence of a central executive management and a well-functioning board of directors, Walter's prevailing discount to fair value should be addressed through a sale to a trade buyer.
In a letter sent directly to Michael T. Tokarz, Chairman of the Board at Walter Energy, and signed by Audley Managing Partner Julian Treger, Audley urged the Board to retain an investment bank and commence a managed sales process without delay.
A copy of the letter follows:
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Mr Michael T. Tokarz
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Chairman of the Board
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Walter Energy, Inc.
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3000 Riverchase Galleria, Suite 1700
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Birmingham, AL 35244
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17th July 2011
Dear Mr Tokarz and Members of the Board,
Audley Capital Advisors LLP is the investment advisor to Audley Capital Management Limited, which is the investment manager of the Audley European Opportunities Master Fund (together "Audley"). Audley holds approximately 900,000 shares in Walter Energy (the "Company"), representing approximately 1.5% of the Company's issued share capital.
As you are aware, Audley was previously a longstanding shareholder in Western Coal and played an instrumental role in facilitating its acquisition by Walter Energy last November to create a sizeable "pure-play" metallurgical coal producer with a diverse global customer base. The uniqueness and strategic importance of this combination has increased due to the growing scarcity of independent and unencumbered coking coal producers and the continued state of undersupply in the seaborne market, evidenced by a sustained environment of high spot and contract prices. We understand the Company expects to earn higher revenues this year than ever before in its 40 year history in the mining business with its production ramp-up on course to reach 20Mtpa by 2013.
Despite our faith in the robust fundamentals of metallurgical coal versus other commodities, we are concerned that the Company now lacks the strong leadership needed to deliver confidently on its plans and take full advantage of this unprecedented market opportunity. Keith Calder's recent departure as Chief Executive Officer citing differences in management philosophy has shaken investor confidence, adding to apprehensiveness around the lack of a permanent CFO and a Board of Directors, many of whom share interlocking directorships, which has not been as effective as we would have expected.
This perceived lack of direction, a stigma which hindered Walter for some time prior to its acquisition of Western Coal, is again weighing on the share price. The Company's multiple rating is at a discount to both domestic and global publicly listed peers: on an EV multiple basis, Walter trades at discounts of 26% and 10% for FY11E and FY12E EBITDA projections respectively. The Company also trades at a discount in the region of 35% to sell-side analyst target prices. [Please see Appendices A and B for our public comparables and analyst target price analysis]
As you are undoubtedly aware, Macarthur Coal, a close comparable of Walter Energy, received an indicative offer this week from Peabody Energy and ArcelorMittal worth A$4.7 billion, representing a premium of approximately 40% to its previous closing price, continuing the trend of consolidation within the coal sector supported by large mining groups and steel producers. The offer values Macarthur at a multiple of 7.9x projected FY12E EBITDA – a valuation multiple that would imply a per share price for Walter of $240, a premium of well over 100% to current levels.
We believe that in the absence of a central executive management and a well-functioning board of directors, Walter's prevailing discount to fair value should be addressed most swiftly and effectively through a sale to a trade buyer.
We have had initial contact via an investment bank with a number of parties who indicated preliminary interest in exploring a potential partial or outright acquisition of the Company. Given this feedback we believe that it is now in the interests of all shareholders of Walter Energy for the Board of Directors to retain an international investment bank, commence a managed sale process and provide due diligence access to interested parties without delay. Please would you confirm your willingness to take these steps?
We have spoken to a number of large institutional shareholders in Walter Energy who have indicated they would be supportive of an approach from a third party at an appropriate price level, and we are proposing the above course of action with those preliminary conversations in mind.
We hope you will receive our suggestions in the constructive spirit in which they are intended, namely being in the best interests of all shareholders, and that you will convene a board meeting in response to this letter shortly. We would appreciate a formal response by Friday 5th August.
Appendix A: Public comparables analysis (market values as at 12th July 2011)
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Market Cap.
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FV
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FV/EBITDA
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P/E
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COMPANY
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(US$mm)
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(US$mm)
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2011E
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2012E
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2011E
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2012E
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WALTER ENERGY
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7,015
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9,701
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4.7x
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4.3x
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5.8x
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5.4x
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PEABODY ENERGY
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15,868
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17,802
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7.0x
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5.6x
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13.2x
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9.6x
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ALPHA NATURAL RE
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10,000
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12,759
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7.1x
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4.9x
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13.7x
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8.6x
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ARCH COAL INC
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5,252
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8,725
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7.1x
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4.8x
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11.7x
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6.3x
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NEW WORLD R-A SH
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3,602
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4,176
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4.5x
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4.3x
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7.7x
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8.1x
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PATRIOT COAL
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2,092
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3,246
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7.6x
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4.8x
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N/M
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7.4x
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CLOUD PEAK ENERG
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1,317
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1,653
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4.8x
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4.4x
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12.2x
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10.5x
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Average
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6.4x
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4.8x
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11.7x
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8.4x
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Source: equity research, company filings, Bloomberg, as of July 12, 2011
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Notes: EBITDA and Net income are Bloomberg consensus estimates, unless otherwise noted.
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Forecast figures are to December year-end. FV adjusted for associates, unfunded pension liabilities and minority interest. Balance sheets as of latest available filings.
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Walter Energy: EBITDA and net income are Audley Capital forecasts; net debt as of May 3, 2011 as per Q1 2011 interim including the Western Coal acquisition debt; balance sheet adjusted for the acquisition.
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Alpha Natural Resources: EBITDA and net income are Bloomberg consensus of analysts who released forecast update post the Massey Energy transaction completion (June 1, 2011); balance sheet adjusted for the transaction.
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Arch Coal: EBITDA and net income are Bloomberg consensus of analysts who released forecast update post the International Coal Group transaction announcement (May 2, 2011); balance sheet adjusted for the transaction.
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Appendix B: Walter Energy current price versus analyst target prices:
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Selected recent broker recommendations
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Broker
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Recommendation
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Target price (US$/sh)
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Date
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Dahlman Rose & Co
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Buy
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148
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11-Jul-2011
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Deutsche Bank
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Buy
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160
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10-Jul-2011
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Iberia Capital Partners
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Sector perform
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160
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08-Jul-2011
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BMO Capital Markets
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Market perform
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135
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04-Jul-2011
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Scotia Capital
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Sector perform
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150
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04-Jul-2011
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Brean Murray Carret
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Buy
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156
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01-Jul-2011
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KeyBanc Capital Markets
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Buy
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165
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27-Jun-2011
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Goldman Sachs
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Neutral/attractive
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140
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20-Jun-2011
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Average
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152
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Current price (July 12, 2011)
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111.56
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% upside to consensus
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36.0%
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Source: Bloomberg, as of July 12, 2011
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SOURCE Audley Capital Advisors LLP