Foundation Coal gets 'fair price'; CF shares trade at discount; SumTotal awaits Accel-KKR move

By Cristal Cody

Tupelo, Miss., May 12 - Alpha Natural Resources, Inc.'s $1.4 billion stock deal to buy rival Foundation Coal Holdings, Inc. and become the nation's third-largest coal producer faces few shareholder and regulatory issues but does include the potential for a counter bid, an analyst told Prospect News on Tuesday.

In other deals, an analyst said Tuesday that shares of CF Industries Holdings, Inc. probably will continue to trade at a discount, even if the company struck an agreement with hostile bidder Agrium Inc.

Meanwhile, investors half expect Accel-KKR LLC to top the $4.50-a-share cash offer from Vista Equity Partners Fund III, LP to acquire SumTotal Systems, Inc. If the private equity firm does make a higher bid, Vista probably will bow out, an analyst told Prospect News on Tuesday.

On Wall Street Tuesday, the markets were mixed. The Dow Jones Industrial Average rose 50.34 points, or 0.60%, to 8,469.11.

The Standard & Poor's 500 index lost 0.89 of a point, or 0.10%, to close at 908.35, while the Nasdaq Composite index fell 15.32 points, or 0.88%, to end at 1,715.92.

Foundation Coal buyout

Alpha Natural Resources and Foundation Coal said Tuesday they will combine to form a new coal company in an all-stock deal valued at $2 billion, which includes the assumption of about $530 million of Foundation debt.

Under the terms of the agreement, Foundation Coal stockholders will receive 1.084 shares of the new company for each share of Foundation Coal, which values the stock at $32.73 a share - a 41% premium over the stock's closing price on Monday.

Each Alpha share will automatically become one share of the new company.

The boards of directors of Alpha and Foundation Coal have unanimously approved the terms.

The merger must receive approval from shareholders of both companies and regulatory clearance.

"We're comfortable with where our shareholders are," Michael Quillen, Alpha's chairman and chief executive officer, said on a conference call with analysts Tuesday. "There are very many similar shareholders amongst the two companies, so we don't expect any of the issues we faced in the last situation we went into in '08."

Alpha had agreed to a $2.7 billion buyout last year by Cleveland-based iron ore producer Cliffs Natural Resources Inc., but the deal fell apart over a Cliffs investor's objections.

Quillen said the Foundation Coal acquisition should close in September.

The transaction's Hart-Scott-Rodino antitrust filing "should not be a big issue due to the diversification of our products and operations," Quillen said.

The deal includes a 3.50% breakup fee for both companies, he said on the call.

Alpha and Foundation Coal representatives did not return calls for additional regulatory information.

Pearce Hammond, an analyst with Simmons & Co. International, told Prospect News on Tuesday that the merger should have few competition issues.

"There's not really a lot of overlap in the area," he said. "The biggest thing to watch is to see if a counter bid develops from another company. It's a fair price. I don't think it's a steal, but I don't think they're overpaying either."

Linthicum Heights, Md.-based Foundation Coal produces thermal coal used by electric utilities and operates mines and facilities in Pennsylvania, West Virginia and Wyoming.

Abingdon, Va.-based Alpha is the nation's largest supplier of metallurgical coal to the steel industry.

The combined company will operate under Alpha's name and trading symbol.

Foundation Coal shares jumped $4.82, or 20.74%, to close at $28.06 on Tuesday. Shares have traded from $8.53 to $89.72 over the past year.

Alpha's stock lost $1.80, or 6.24%, to close at $27.06.

CF shares stunted

Agrium said Monday that it increased the bid for CF Industries by 14.30% to $85.20 in cash and stock, or $40.00 in cash and one share of Agrium for each CF share.

CF Industries shares rose $1.48, or 1.95%, to close Tuesday at $77.30, still under the offer's value.

Because of potential lengthy regulatory approvals, CF Industries' stock will "likely trade at a 6.00%-7.00% discount to Agrium's bid price," an analyst said Tuesday.

"In our view, CF is unlikely to trade above $84.00 even if a deal is agreed at $90.00 given the timing and regulatory risks related to the transaction," the analyst said.

The Calgary, Alta.-based agricultural products company's offer for Deerfield, Ill.-based CF Industries is contingent on CF Industries dropping its own hostile takeover attempt of nitrogen producer Terra Industries Inc.

Agrium said that as of Friday, about 1.27 million share of CF Industries had been tendered in its offer, which expires on June 15.

Shares of Agrium added $1.56, or 3.51%, to close at $46.05 on Tuesday.

Shares of Sioux City, Iowa-based Terra gained $1.41, or 5.61%, to finish at $26.54.

SumTotal negotiates

SumTotal said in a statement Tuesday that its board determined that Vista Equity's offer is superior to the $3.80-a-share deal it struck with Accel-KKR on April 24.

The Mountain View, Calif.-based software solutions company said it is required to negotiate in good faith with Accel-KKR for three days through Thursday under the agreement's terms.

Accel-KKR spokesman Joseph Kuo told Prospect News on Tuesday that the firm has no comment.

Under the merger agreement with Accel-KKR, SumTotal was given until May 23 to consider alternative proposals.

Accel-KKR could walk away from the deal with a $3.1 million breakup fee, Eric Martinuzzi, a senior research analyst with Craig-Hallum Capital Group LLC, said in an interview Tuesday.

"On the other hand, they've done a significant amount of due diligence on the company and money's been spent on lawyers, accountants," Martinuzzi said.

"I do believe this is as high as Vista Equity goes, but I don't know if this is as high as Accel-KKR goes," he said. "If this deal made sense for Accel-KKR at $3.80, it means there's some profit margin. Obviously, private equity firms aren't in business to lose money, so if somebody has a $4.50 bid on the table, they must think [SumTotal is] worth more than that."

Vista Equity, SumTotal's largest shareholder with about 13% of outstanding shares, first offered $3.25 a share to buy out SumTotal in April.

SumTotal's board said it not withdrawing or amending its recommendation on the Accel-KKR agreement or making a recommendation on the Vista proposal.

Shares of SumTotal fell 5 cents, or 1.09%, to close Tuesday at $4.55.

Mentioned in this article:

Agrium Inc. NYSE: AGU

Alpha Natural Resources, Inc. NYSE: ANR

CF Industries Holdings, Inc. NYSE: CF

Cliffs Natural Resources Inc. NYSE: CLF

Foundation Coal Holdings, Inc. NYSE: FCL

SumTotal Systems, Inc. Nasdaq: SUMT

Terra Industries Inc. NYSE: TRA

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