Steve James

NEW YORK — Reuters, Friday, May. 15, 2009 03:33PM EDT

Alpha Natural Resources Inc. said it will acquire Foundation Coal Holdings Inc. for $1.5-billion (U.S.) to create the third-largest U.S. coal producer in an all-stock deal expected to begin a wave of consolidation in the fragmented coal-mining industry.

Both sides said the strategy behind the acquisition was to position the merged company to benefit from an expected rebound in demand from steel makers and power plants for coal.

Alpha offered a 41-per-cent premium for Foundation in the first of an anticipated spate of deals seen to bring together smaller players in the industry to better compete with larger rivals.

Foundation Coal's stock surged 33 per cent to $31.08 in morning trade on the New York Stock Exchange, and Alpha was down about 1 per cent at $28.57. Other coal stocks rallied on the news, with the DJ Coal Index up nearly 2 per cent.

The merger, expected to close in August or September, comes at a time of economic downturn when coal prices have slumped and demand for electricity and steel – the two biggest customers for coal – has dropped off.

“The potential upside is that Alpha is the largest producer of [steel-making] metallurgical coal,” James Roberts, Foundation's chairman and chief executive officer, told analysts on a conference call.

“Electricity demand is forecast to grow again in 2010 and beyond … and when the economy recovers, [coal] supply will struggle to keep up with demand, so prices will recover,” he said.

The deal, which tops $2-billion after adding in $530-million in debt, values Foundation at $32.73 a share, a 41-per-cent premium to its Monday closing price.

The combined company will operate 59 coal mines and 14 preparation plants across the United States, with reserves of more than 2.3 billion tons of coal, Alpha said.

It forecast production this year of between 92 and 98 million tons, making it the third-largest U.S. coal producer. The new Alpha expects to have revenue this year of $3.4-billion to $4.2-billion, it said.

“We're creating a true U.S. leader in the energy sector with balance, size and scale,” said Michael Quillen, CEO of Alpha.

Under the deal, Foundation stockholders will receive 1.084 shares of the new company for each share held, while each share of Alpha will automatically become one share of the combined company.

Alpha Natural expects the deal to add to adjusted earnings and cash flow earnings in 2010.

The total consideration consists of about 50 million shares of the new company's stock and assumes about $530-million of Foundation Coal's debt, Alpha Natural said.

The combined company will have a market capitalization of $3.5-billion. Alpha Natural shareholders will own 59 per cent of the combined company and Foundation shareholders will own the rest.

Upon closing of the deal, Alpha's current president, Kevin Crutchfield, will become chief executive. The deal, which has been approved by both the companies, is expected to be completed later this year.

The combined company will retain the Alpha name and will continue to trade on the New York Stock Exchange under Alpha's current ticker symbol ANR.