Analysts say US coal merger not anti-competitive

The proposed “extraordinary” joint venture between US coal majors Peabody Energy and Arch Coal will be structurally beneficial, rather than anti-competitive for US energy markets in the long run, according to Jefferies analysts.

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Jefferies on Peabody and Arch’s proposed “extraordinary” coal JV

Jefferies on Peabody and Arch’s proposed “extraordinary” coal JV

They said this was a result of radical changes in US energy markets, due to hydraulic fracking (gas) and advances in technology.

Peabody and Arch announced their plans last week, which would see the pair's Powder River Basin (PRB) and Colorado assets combined and unlock an estimated US$820 million in pre-tax synergies.

In a note dated yesterday, Jefferies analysts said they believed market concentration and pricing power would be considered for the broader energy market, not thermal coal in the PRB, due to the end markets served.

"In our view, a consolidated PRB asset base should be favourable for utilities rather than anti-competitive as it will enable PRB mines to survive and be a third source of energy supply to utilities," analyst Chris LaFemina said.

"We expect this JV to get regulatory approval on the grounds that it will be beneficial to the highly competitive US energy market."

Wyoming Governor Mark Gordon said the proposed combination better positioned the two companies "to be more competitive in a changing market while providing solid employment going forward".

"In our office's preliminary discussions with Peabody president and CEO Glenn Kellow, we perceived this move to be a positive step," he said in a statement.

Both companies have emerged from Chapter 11 bankruptcy proceedings in recent years, while fellow PRB producer Cloud Peak Energy voluntarily filed for Chapter 11 last month, saying it believed a sales process would provide the best opportunity to maximise value.

Jefferies analysts reiterated a buy rating for both Arch Coal and Peabody.

LaFemina put a price target of US$115 for Arch shares, which last traded at $93.91.

He said Peabody's price target was $38, compared with its Friday close of $23.81.

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