Un-Done Deal

Opponents block Cliffs Natural Resources’ $10 billion deal to buy Alpha Natural Resources.


Last summer the leadership of Cliffs Natural Resources outlined an ambitious growth strategy for the 161-year-old Cleveland-based mining company, the No. 1 iron ore producer in the U.S. Chief executive Joseph Carrabba and his team envisioned Cliffs becoming a more diversified mining conglomerate. The cornerstone of the plan was to be the acquisition of rival coal producer Alpha Natural Resources, of Abingdon, Virginia, in a cash-and-stock deal originally valued at $10 billion, or $128 per Alpha share, a 35 percent premium. The agreement, negotiated with the help of Cliffs’ bankers at J.P. Morgan Securities and signed in July, would have led to one of the largest-ever deals in the mining sector.

But the whole thing fell apart five months later amid intense criticism from shareholders who didn’t want to see Cliffs become another conglomerate, like Rio Tinto Group, where Carrabba worked for 22 years. Rio Tinto shares have lost about 80 percent over the past year, amid takeover battles and cutbacks. Cliffs-Alpha would have had a portfolio that included nine iron ore facilities and more than 60 coal mines across North America, South America and Australia, and would have combined Cliffs’ estimated 2008 revenue of $3.7 billion with Alpha’s estimated $2.56 billion.

Tony Robson, a metals and mining analyst at BMO Capital Markets Corp. in Toronto who says the deal would have been “slightly” dilutive, views it as a classic example of a company’s management having a different agenda than that of its owners. Adds an industry banker: “The coal mines were what shareholders really disliked. To them it was like McDonald’s buying Best Buy; they prefer the pure play in iron ore. Cliffs virtually has no competition in North America, where there are numerous coal companies.”

The biggest critic of the proposed Cliffs-Alpha merger was Philip Falcone, a senior managing director at hedge fund Harbinger Capital Partners, which as of last fall ran $20 billion and specializes in spin-off, liquidation and M&A situations. It is Cliffs’ biggest investor, with 5.6 million shares. Falcone publicly stated that he would like to see Cliffs sold. The share prices of both companies fell nearly 90 percent last fall amid the battle with shareholders, ultimately reducing the value of the deal to $2.88 billion.

On November 17, Cliffs officially canceled the transaction with Alpha. Since then, Cliffs shares have increased to about $23 from a 52-week low of $13.73. They are still well below their 52-week high of $121.95 and the $100 level of last July.

In a joint press release, Cliffs and Alpha cited a multifaceted rationale for pulling the plug: “various issues, including the current macroeconomic environment, uncertainty in the steel industry, shareholder dynamics and risks and costs of potential litigation.” The companies declined additional comment.

Multibillion-dollar mergers and acquisitions in the mining and steel sector are fairly rare, usually occurring no more than once a year, says Natixis Bleichroeder analyst Jeremy Sussman. One exception is U.K.-based Rio Tinto, the world’s largest mining conglomerate, which in 2007 paid $38 billion to acquire Canadian aluminum producer Alcan to become the global leader in the metal. Sussman notes that smaller deals are easier to get done without having to deal with shareholder “dynamics” and that larger deals are often not necessary when purchasing mining operations.

There is a maxim on Wall Street that says,“Time kills all deals.” Cliffs management said in the fall that it wanted to delay a shareholder vote until December 19 to buy time to convince investors that it wasn’t heading in the wrong direction and that the deal was accretive. Those efforts barely moved the ball. Instead, Harbinger Capital threatened to increase its holding in Cliffs to the level needed to single-handedly block the acquisition.

The failed deal was a setback for Cliffs, which had to pay a $70 million breakup fee to Alpha. But Cliffs has plenty of cash, and analysts say it’s likely to spend 2009 looking for new targets, albeit on a smaller scale.