The court decision follows the February split decision by the US Federal Trade Commission on the proposed joint venture, siding with the FTC.
The FTC in February threw the matter into the legal realm by filing an administrative complaint, alleging the transaction would eliminate competition between Peabody and Arch Coal, the two major competitors in the market for thermal coal in the southern Powder River Basin, and the two largest coal mining companies in the US.
The FTC's Bureau of Competition director Ian Conner welcomed the companies' joint decision to abandon the joint venture on Tuesday.
"Peabody and Arch's decision to abandon their joint venture will preserve competition in the market for thermal coal, which is sold to power-generating utilities that provide electricity to millions of Americans. The joint venture likely would have raised the price of coal to the utilities, and ultimately to consumers," he said in a statement.
Arch and Peabody have agreed to discontinue legal efforts.
Arch, nearly three times the size of Peabody, said while it strongly disagreed with the verdict, it would aggressively drive forward with its strategic pivot towards steel and metallurgical markets and in parallel, intensify its pursuit of strategic alternatives for its thermal assets as the best course of action for the company and its shareholders.
"In the wake of today's decision, we will be intensifying our pursuit of strategic alternatives for our thermal assets - including, among other things, potential divestiture - while evaluating opportunities to shrink the operational footprint at those mines, reduce their asset retirement obligations, and establish self-funding mechanisms to address those long-term liabilities," said Arch CEO Greg Lang.
In the meantime, Arch will maintain a sharp focus on aligning thermal production rates with deteriorating domestic thermal demand; adjusting thermal operating plans to reduce future cash requirements; and streamlining the entire organisational structure to reflect its long-term strategic direction.
Arch produces some of the best-quality met coals, and it is making progress towards the 2021 start-up of the world-class Leer South metallurgical mine.
Peabody CEO Glen Kellow also expressed "deep disappointment" with the decision. "Our focus now is on continuing to be the low-cost PRB coal provider to best compete against natural gas and subsidised renewables," he said.
The transaction was announced in June last year and proposed to structure ownership with Peabody owning 66.5% and Arch owning 33.5%. If consummated, the joint venture was to realise annual synergies of US$120 million over an initial 10-year period.
Moody's Investors Service lead coal analyst Benjamin Nelson said the development was credit-negative for both companies.
"We expect the PRB coal production region will remain under significant pressure in 2021 and at least a few coal mines in the region could close in the early 2020s."
Moody's this week launched its first global coal outlook report, flagging long-term structural problems for thermal coal to persist, especially in North America and Europe. According to the report, demand for thermal coal is eroding rapidly, and US producers are losing market share in the export market, with 2020-21 met coal volumes likely to be well below 2018-19 levels.