NWR fails in $1.2 bln bid for Polish coal miner Bogdanka, still keen on JSW

NWR’s cash offer represented a 43 percent premium over what key Polish pension funds bought into Bogdanka for this spring.

NWR's customers include ArcelorMittal, US Steel and ČEZ | na serveru Lidovky.cz | aktuální zprávy NWR's customers include ArcelorMittal, US Steel and ČEZ | foto: © NWRČeská pozice
NWR's customers include ArcelorMittal, US Steel and ČEZ

Mining and energy group New World Resources (NWR), controlled by Czech billionaire Zdeněk Bakala, failed to meet its target 75 percent acceptance threshold in a $1.2 billion (€857 million) bid for leading Polish thermal coal producer Lubelski Wegiel Bogdanka but will push on with its goal to become a “regional champion” through strategic acquisitions, company officials say.

“NWR continues to examine a range of interesting business development opportunities in Poland and Ukraine,” NWR executive chairman Mike Salamon said in a statement issued Nov. 30, the day after its subscription period expired.  “Meanwhile, our commitment to Poland and to investing in our existing Polish projects at [the coal mines of] Dębieńsko and Morcinek remains as strong as ever.”

The company on Oct. 5 made a cash offer to shareholders in Warsaw-listed Bogdanka of PLN 100.75 per share — a 43 percent premium over the price at which key shareholders (Polish pension funds) bought into Bogdanka this spring in a bulk trade from the Polish government in March — Marek Jelínek, NWR’s chief financial officer, said in a telephone interview before the bid’s Nov. 29 closing date.

The offer — rejected by Bogdanka management and major shareholders as being below the market value for a controlling stake in the Polish heating coal producer — represented a 13 percent premium over the Oct. 4 share price. The company has said from the start it would not increase its PLN 100.75 per share, but had not ruled out lowering the acceptance threshold.

“Given the strong industrial and strategic logic of our offer, this transaction was always going to come down to price,” Salamon said. “The outcome further demonstrates NWR’s record of strict financial discipline.” ‘Given the strong industrial and strategic logic of our offer, this transaction was always going to come down to price.’

Adding insult to injury, in the eleventh hour Bogdanka also notified Poland's Financial Supervisory Commission (KNF) that NWR may have breached the law by disclosing information that could have affected the Polish company's share price.

The breach would have occurred in connection with the modification of the bid price via a subsequent offer of NWR's new shares in exchange for the Bogdanka shares, the Prague-based brokerage Wood & Co. said.

“Offering of newly issued shares of NWR and placing it to certain Bogdanka shareholders at discount to market price might have led to the economical modification of the bid price to PLN 103.2 - 137.6 range," the brokerage said. That would correspond to the swap parity of 3-4 NWR shares per one share of Bogdanka, despite leaving the headline offer price unchanged at PLN 100.75 per share, according to Wood & Co.

That legal challenge aside, from the outset Bogdanka's management, backed by its unions, soundly rejected NWR's advances as “undervaluing” the Polish miner, and — in an apparent effort to underscore the point — in recent weeks also announced that a number of major contracts were in the works.

On Oct. 20, the Polish hard coal miner said it had signed a $4.4 billion long-term supply deal with the Elektrownia Ostrołęka power plant in northeastern Poland. And in mid-November, Bogdanka announced it was also close to signing a 2-million Mt/year supply deal with Polish investment company Kulczyk Holding, which plans to construct power plants in Poland and neighboring Belarus.

Jelínek said these new deals “didn't really affect” NWR's evaluation of Bogdanka — or the price the company was willing to offer key shareholders — but given the challenge of placing coal onto the market while maintaing healthy margins, “it certainly helps that it has a long-term offtake agreement — but that certainly does not cover 5.5 million [Mt/year] produced by Bogdanka. So that is one of the risk factors we're concerned with.”

‘Steam’ coal good, coking better

Bogdanka, incorporated in Poland and listed on the Warsaw Stock Exchange (WSE), is among the largest hard coal miners in Poland and a major producer on the country's domestic market for thermal coal, used to produce steam to generate power and heat.

In 2009, the miner produced 5.2 million Mt of coal representing about 7 percent of Poland’s total coal output and 11 percent of the market share in coal supply to power plants in Poland.

Coking coal is mainly used to produce coke to feed steel furnaces and foundries: NWR, the Czech Republic’s largest producer of coking coal, like Bogdanka also produces “steam” coal — but did not bid for Bogdanka to diversify its product mix.

“We are not trying to diversify away from coking coal. […] Fundamentally, we believe that coking coal is much better business,” Jelínek told Czech Position. “Clearly, coking coal captures a higher margin than thermal coal. But more importantly — on a global scale — it is a constrained commodity, and one that cannot be replaced in the production cycle.”

NWR’s total coal production is expected to exceed 11.5 million Mt in 2010, according to the company’s third-quarter results released Nov. 19, with its coking coal sales volumes expected to account for 60 percent of total external sales (up from 51 percent in 2009).

Had the bid to take control of Bogdanka succeeded, the combined entity of NWR and Bogdanka would have generated about one-third of its revenues from thermal coal, according to Jelínek's projections.

Like other mining companies, NWR’s appetite for acquisitions is growing in line with increasing demand for commodities as the global economy recovers. Steel production in its customer markets rose by 36 percent year on year in Q3 2010, according to the World Steel Association; however, production was still 13 percent lower compared to Q3 2008).

Appetite for expansion

Key customers for NWR include the Czech unit of ArcelorMittal (the world’s largest steelmaker), US Steel and Czech state-controlled power producer ČEZ, listed in Prague and Warsaw. The Czech Republic generates roughly 59 percent of electricity from coal and Poland nearly 90 percent.

NWR is investing €25 million in the execution of a detailed development schedule for its Dębieńsko project, which is expected to break ground during the course of 2011. This initial investment is part of the €350-400 million that NWR has earmarked over the next five years to open the Dębieńsko mine, which is expected to create up to 2,500 new jobs in Poland.

“What we are trying to do is to create a ‘regional champion,’ if you will, a very significant [player] — in terms of size and balance sheet — that will have the power and the means to become a regional consolidator,” Jelínek said, adding that was also “the key motivation” behind NWR's bid for Bogdanka.

Furthermore, Jelínek confirmed that NWR remains “very interested” in Polish coking-coal miner Jastrzębska Spółka Węglowa (JSW), with which in 2007 it to cooperation with to extract coal from the defunct Polish mine Morcinek, via NWR’s nearby shafts near the Polish-Czech border.

“The Polish government has declared that JSW is to be privatized in the course of next year [2011], and we will certainly be watching the process very closely,” Jelínek said. “[But] we will have to wait and see what the process will be like and what the terms are.”

NWR also remains committed to its development projects and investments in Poland, the company said. NWR’s workforce includes more than 2,600 Poles currently working on its Czech operations, and the company's development projects in southern Poland (Dębieńsko and Morcinek) are overseen by its wholly-owned Polish subsidiary NWR Karbonia.

NWR — based in the Netherlands and listed in Prague, Warsaw and London — also announced Oct. 5 its intention to reincorporate in the United Kingdom in the first half of 2011, in the belief that this would allow FTSE series index eligibility.

Jelínek said the ongoing process to reincorporate NWR as a UK plc. would not result in moving NWR’s headquarters. “We will continue to be residents and taxpayers in the Netherlands,” he said.