Coal giant Massey Energy, losing money and facing a criminal investigation following the deaths of 29 miners at its Upper Big Branch mine in West Virginia, announced Saturday that it is being acquired by rival Alpha Natural Resources in an $8.5 billion deal.
The sale, rumored in industry circles since the end of last year and agreed to just before midnight Friday, would mark an end to the Richmond, Va.-based bituminous giant that dominated portions of Appalachia during an era in which it was led by a latter-day coal baron who spent millions to install legislators and state judges.
Shareholders of both companies must approve the transaction, which is also subject to regulatory approval by the Justice Department and Federal Trade Commission. Abingdon, Va.-based Alpha expects to complete the purchase by the middle of this year.
Once the deal is done, Alpha shareholders will own 54 percent of the combined company, and Massey's stockholders will own 46 percent.
Alpha also has arranged a $3.3 billion loan through New York-based Morgan Stanley to complete the transaction.
The agreement will create the largest U.S. provider of metallurgical coal used by steelmakers. It will operate 110 mines, have 5 billion tons of coal reserves and would have had revenue of $6.9 billion based on each company's 2010 results.
Alpha CEO Kevin Crutchfield called it a "truly transformational deal."
"The strategic and operational fit of our two companies is clear and compelling. Both companies' stockholders will gain an opportunity to participate in the upside potential of a global industry leader with a robust production portfolio, attractive growth profile and substantial reserve base," Mr. Crutchfield said in a prepared statement. "Together, we are committed to creating a stronger company that has the scale to capitalize on further growth opportunities, succeed in a changing regulatory landscape and maintain the absolute highest standards in safety and environmental excellence."
Alpha's offer is welcome news to Massey shareholders, who saw their stock plummet below $27 in July after the Upper Big Branch explosion in April, which killed 29 miners. The coal producer announced late last year it was considering strategic options, including the sale of the company. Chairman and CEO Don Blankenship, besieged by regulators, investors and union leaders, retired at the end of the year from a tenure marked by high-profile controversy. Under Mr. Blankenship's rule, Massey became a prominent opponent of unions and was the target of widespread criticism over safety practices.
Facing intense pressure from investors over its safety record and Mr. Blankenship's domination of the company, Massey adopted some governance changes last year, but continued its aggressive stance in the media regarding its safety record and the probe of the explosion.
The firm has a long history of violations.
In 2006, a fire at the company's Aracoma mine in Logan County, W.Va., led to the firm pleading guilty to safety violations. After the explosion at Upper Big Branch, the company embarked on a heads-on confrontation with the federal Mine Safety and Health Administration, openly attacking MSHA's theories on the cause of the deadly blast.
On Friday, Massey officials held a telephone news conference in which they repeated their theory -- derided by MSHA and federal investigators -- that a sudden burst of natural gas at Upper Big Branch caused the explosion that rolled for more than 2 miles underground. Federal inspectors say a small methane blast expanded by detonating far more explosive coal dust in a mine that had been poorly maintained.
In his tenure at Massey, Mr. Blankenship bankrolled the candidacy of a West Virginia supreme court judge who would be in a position to rule in a civil suit involving the company. He later bankrolled a number of candidates in a failed attempt to gain influence in the state legislature.
Mr. Blankenship's successor at Massey said on Saturday night that the move would provide a profit to Massey shareholders.
"After a careful review of a wide range of strategic opportunities, our board unanimously determined that this is the right course for our company. The merger with Alpha offers Massey stockholders an immediate and substantial premium," said Baxter F. Phillips Jr., current Massey CEO.
Some of Massey's most vocal critics in the environmental, safety and labor fields were unsure about how much change Alpha will bring but were unquestionably pleased to see Massey go.
Kentucky-based mine safety attorney Tony Oppegard, a former official at MSHA, said Massey did itself no favors in its obstinate public relations strategy after the Upper Big Branch explosion, and the company's poor public image likely led to its sale. But the company had a long history of noncompliant mines and a belligerent attitude toward government regulations.
"I think it's fair to say that Alpha's safety record is better than Massey's," Mr. Oppegard said. "That's not to sing Alpha's praises, it's to say Massey has a bad reputation. I guess all you can do if you're a miner or safety advocate is wait and see how Alpha does and hope that they place a higher emphasis on safety than Massey did."
Massey was regarded as strongly anti-union. United Mine Workers spokesman Phil Smith said Alpha has a handful of union mines -- but they were inherited in acquisitions, and the company isn't particularly friendly to the UMW. Still, the union is on speaking terms with Alpha management, which is more than it could say for Massey.
"The end of the Massey name will come as no great loss to coal miners and their families," Mr. Smith said.
On environmental issues, though, Alpha has a similar poor record to Massey, according to Mary Anne Hitt, the director of the Sierra Club's Beyond Coal Campaign. The company is less outspoken and aggressive, she said, but their practices are "about on par" with Massey.
"They are one of the top offenders in Appalachia when it comes to mountaintop removal," Ms. Hitt said, referring to the practice in which mining companies lop off the top of a mountain to get to hard-to-reach coal, filling surrounding streams with debris.
"To date they have had a smaller portfolio, for lack of a better word. Massey has had a lot more land and a lot more mines and a lot more of an area, and Alpha was mostly limited to Southwest Virginia. They are obviously aggressively expanding."
The price Alpha is paying for Massey and the unknown liabilities Massey faces from the Upper Big Branch explosion probably will prevent any other company from making a counter offer, said Jeff Mindlin, manager of the Pittsburgh-based Mindlin Fund.
"They're paying a big, big premium for the company," he said.
Mr. Mindlin said the combined company should have more leverage in negotiations with customers. Many analysts expect metallurgical coal prices to continue rising over the next several years, a trend that would allow Alpha to pay off debt from the purchase sooner, he said.
Alpha has a "much better operating record and seems to be a more responsible party" than Massey, Mr. Mindlin said.
"They're a much better run company than Massey is from stem to stern," he said.
Alpha spokesman Ted Pile said the company's current board, chairman, CEO and president will remain in place and run the combined operation. He said Alpha had discussed merging with Massey for several years, but talks intensified last fall.
Alpha, which has mines in several states, including Pennsylvania, has 6,400 employees, while Massey has 7,500.
Under the terms of the offer, Massey shareholders will receive 1.025 shares of Alpha stock and $10 for each other of their shares. The offer values Massey shares at $69.33, a 21 percent premium to their closing price Friday of $57.23.
The deal marks the second major acquisition for Alpha. In 2009, the company purchased Foundation Coal Co. for an estimated $2 billion.