Alpha Natural deal meets resistance

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Despite an objection from its largest shareholder, Cleveland-Cliffs Inc. wants to continue with its proposed $8.27 billion acquisition of Abingdon-based coal producer Alpha Natural Resources. New York hedge fund Harbinger Capital Partners, which owns 18 percent of the stock in the Cleveland international mining company, said in a filing with the Securities and Exchange Commission that the deal is not in the best interests of shareholders.

  However, Cleveland Cliffs —  the largest producer of iron ore pellets in North America — defends it as a way to boost the company’s profile as a global supplier.  The coal industry has seen prices reach record highs because of a surge in demand and tight world supply. For the first quarter of 2008, Alpha Natural Resources’ net income tripled to $25.5 million.

The combined company will be called Cliffs Natural Resources, with its coal business based in Abingdon and iron operations based in Cleveland. Joseph A. Carrabba, the chairman, president and CEO of Cleveland-Cliffs, will become CEO of the combined company. Michael Quillen, chairman and CEO of Alpha Natural, will become the company’s nonexecutive vice chairman.

If approved by shareholders and regulators, the merger plan would give investors 0.95 shares of Cleveland-Cliffs stock and $22.23 in cash for each Alpha Natural Resources share. That would be a 35 percent premium on the stock based on the closing price before the merger was announced on July 16. Alpha shareholders will own 40 percent of the merged company, with Cleveland-Cliffs investors owning the rest.

“I think this is a great deal for Alpha shareholders,” says Pearce Hammond, an energy analyst for Simmons & Co. International in Houston. “They’ll still have 40 percent of the company under the deal, which gives them great leverage.”

The new company would become one of the largest mining companies in the U.S., with nine iron-ore facilities and more than 60 mines in North America, South America and Australia.
Hammond points out that the deal could make the merged company an attractive target for a steel manufacturer. “Steel producers are looking for security of supply, and their two key needs are iron ore and metallurgical coal.” 

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