The news from Peabody Energy Corp (OTCMKTS:BTUUQ) wasn’t good for common shareholders. The company said:
As part of the plan of reorganization, the company anticipates emerging as a public company. As frequently occurs in Chapter 11 processes, the plan provides that current Peabody Energy equity securities will be cancelled and extinguished upon the effective date of a confirmed plan of reorganization by the bankruptcy court, and holders would not receive any value for such equity interests.
This news isn’t surprising. Typically, in these types of proceedings, management looks to collude with creditors to keep as much of the pie for themselves and cut common shareholders out. The key for them is keeping the company’s valuation as low as possible and getting the Judge to take their side. Management keeps their jobs, gets some new equity, and creditors make a big return on their bonds, which get converted into shares of the new company. This is clearly the case with Peabody and CEO Glenn Kellow reaffirmed this when he said:
“Today’s proposed plan is an important achievement in our path toward emergence. The plan charts Peabody’s course forward and reflects an enormous amount of work by the company and multiple creditor groups to advance a proposal that has broad consensus, maximizes the value of the enterprise and paves the way for a sustainable future. We look forward to moving toward confirmation of the plan.”
The news hit the tape just ahead of the last trading day before the Christmas holiday. The reaction was swift and brutal at the beginning; however, shares managed to rally off the lows and closed off just 9%. This was a major victory for shareholders as dip buyers stepped in on the belief that Mangrove Partners will not take this lying down.
At the end of October, Mangrove Partners was able to squeeze the shorts after taking a 5.2% stake in Peabody. The hedge fund started pushing for an equity committee to be formed. The fund said that it was in the process of retaining legal and financial advisers to assist Peabody in seeking the formation of an official equity committee and to preserve and realize on the “substantial value” of the company’s shares.
According to management, Peabody will emerge from bankruptcy with an enterprise value of $4.275 billion. However, this value does not take into account the improvement in Peabody’s core business. Peabody and Japan’s Nippon Steel set the Q4 contract benchmark for metallurgical coal at $200/metric ton, more than twice the Q3 price, Reuters reports. The big jump underscored a resurgence in Asia’s appetite for coal that also has been reflected in a recent mark-up in spot cargoes. The result was that for the month of November, Peabody posted sales of $419.6 million and EBITDA of $122.3 million. Even on the low end of using a 5x multiple, we come up with an enterprise value of over $7 billion, discrediting management’s own valuation.
Further helping coal companies like Peabody is the election of Donald Trump. Throughout the coal belt, miners and company executives like Robert Murray were 100% behind Trump. Trump has promised to rollback the regulations Obama and the Democrats have put on the coal companies. Doing so would make coal much more competitive to natural gas. Trump will also most likely end subsidies to solar companies and other alternative energy players that have impacted coal miners.
Currently trading with a market cap of $138 million, we believe that soaring met coal prices in Australia and an incoming Trump administration make Peabody certainly worth more than the business plan Peabody management put forth back in August. No doubt, management is trying to push this through as they’ll wind up with a 10% stake in the new company. We believe Mangrove has a very strong case to make to the Judge that the plan put forth is highway robbery. This is why shares of Peabody are still trading where they are and not below $1. There’s a lot of value in the new Peabody and common shareholders deserve their piece. We will be updating our subscribers as soon as we know more. For the latest updates on BTUUQ, sign up below!
Disclosure: We have no position in BTUUQ and have not been compensated for this article.