Peabody Energy (BTU) owned 3.7 billion tons of coal reserves at the end of 2010, all of them in the US. The company had another 5.4 billion tons in reserves taken on lease. Of them, 1.1 billion tons were in Australia. The company sold 245.9 million tons of coal (of which 9.8 million tons was Australian met coal) in 2010 for total revenue of $6.9 billion ($28.1 per ton). Net income and free cash flows came in at $802.2 million and $530.1 million, respectively.
The company reported debt of $2.7 billion at the end of 2010. However, with liquidity of $1.3 billion on its books, its net debt was lower, at $1.4 billion.
In late 2011, Peabody Energy (BTU) acquired McArthur Coal of Australia for $5.2 billion to boost its met coal portfolio. In 2010, MacArthur Coal produced over 4 million tons of met coal. At the time of the acquisition, BTU management expected production to double to over 8 million tons. The acquisition added over 2.3 billion tons of reserves to the company’s portfolio, including 270 million tons of met coal reserves.
Needless to say, the ill-timed and overpriced acquisition soon failed with a drop in coal prices, similar to the failed acquisitions from Walter Energy (WLT), Alpha Natural Resources (ANR), and Arch Coal (ACI). The company had borrowed around $4.1 billion in 2011 to fund the acquisition. As of September 30, 2014, the company had over $5.9 billion in debt. Read our summary of BTU’s 3Q 2014 earnings report for more details.
What was the common link between the failures of the acquisitions we’ve considered in this series? Find out in the next part.