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Peabody Energy Corp (OTCMKTS:BTUUQ) Looks To Shaft Shareholders

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!

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Disclosure: We have no position in BTUUQ and have not been compensated for this article.

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Peabody Energy Corp (OTCMKTS:BTUUQ) Looks To Shaft Shareholders
9 Comments

9 Comments

  1. Ollek

    December 27, 2016 at 5:22 pm

    Alex. This is a great article and yes it does look like the Peabody Mgt Team are trying to get away with a heist. While the reorg has huge upside for Glenn Kellow and the new ownership, i am wondering about the current Directors of the Board. Does their fiduciary duty to the shareholders oblige them to speak up and stop this reorg plan. Or do they just go along with the CEO’ s plan. They must have approved it so are they complicit and by definition if later evidence shows their was misinformation deliberately provided in the reorg plan is it the Directors that are liable?
    If we fast forward to 2018 and the reorg company leads to a $10 -20 billion company rather than a $4.1 billion equity that makes for an eye watering success for Team Glenn. But does this leave the former Board of Directors liable in a class action by former shareholders?

  2. LT Shareholder

    December 28, 2016 at 6:04 am

    Ironic this company founded in 1885 survived the Great Depression and the 2008-2009 financial crisis, but can’t survive 6 months of trough coal prices in early 2016 thanks to lending agreement technicalities. There was is no structural financial problem, they are cash flow positive (big-time). This is the United States, held up to the world as the ideal capitalism – will lenders and management get away with this?

  3. scott haney

    January 2, 2017 at 12:41 pm

    Trump needs to get involved in this obvious theft from shareholders. One tweet and Peabody management might change their minds.

  4. Ollek

    January 3, 2017 at 6:02 pm

    We are headed fir some interesting BK Court days from 26 Jan to April 2016.
    The reorg plan that Peabody SMT agreed with Creditors is predicated on coal world Jan -April 2016. Alas that is not the coal world the last 6 months or outlook going forward next 5 years.
    The Reorg plan involves a 10 percent equity reward to SMT. The reorg plan to be put to BK Court is built on the premise that the company is no longer liquid and cannot service operations or debt servicing in future.

    Starting to look like a big lie…..

    Lets see if they can pull the deceipt off at BK Court level. If they can the SMT get 10 percent of the worlds biggest coal company.

  5. Ollek

    January 3, 2017 at 6:03 pm

    Ops. Interesting court hearings are 2017. Not 2016.

  6. Hank

    January 4, 2017 at 11:17 pm

    They have been clear about the fact that the shares wont be worth anything from the get go. How is it shafting the shareholders when they cleary defined the risk?

    • Gila Riverman

      January 5, 2017 at 8:43 am

      If the shares aren’t worth anything, how giving shareholders 8.5% of the new company and letting management keep their current 1.5% of the company. If the company turns out being worth $10 billion, with $9 billion in equity, that would give the current shareholders an equity value of $765 million (8.5% of $9 billion), which would equate to about $41 per BTUUQ share. Management would still get a whopping $135 million.

  7. Ollek

    January 5, 2017 at 5:47 am

    Hi Hank. The SMT may well have the view that shareholders will loose everything. It is just a bit strange that SMT came up with a deal that gets them 10 percent of the worlds biggest coal company.
    And that in 9 months in Ch 11, they seem to have a dead hand at the wheel and didnt grab the opportunity to save the company by having a fire sale of some assets as coal prices boomed. But that might have save the company and not allowed the SMT to carry our their little dirty deeds!.

    The other coal operations here in Australia have had a stella run the last six months – and the best Peabody SMT can do is cut a 10% kickback in equity in the new company in exchange for destroying existing shareholders.

    Maybe Peabody is dire and has no prospect of recovery – just strange that other dire coal companies have managed an amazing rebound with these record prices for OZ met coal the last 6 months and much improved outlook for 2017-20. Seems coal is no longer dead and buried.

    And if tPeabody is so struggling and not viable to manage future debt servicing – its strange the SMT wont share any such info with shareholders that ring the St Lois office. No updates or information to shareholders. Only what is in the reorg plan – apparently all hope is lost, company is finished and so this reorg deal is the only option.

    Is it fair to reduce shareholders shareholding to zilch – but then the company continues trading after April 2017 and the booming coal conditions allow the SMT a massive windfall to their own wealth.

    Is that how a SMT and Board deliver their fiduciary duties.

    No problems if the company is no longer liquid and cannot trade – that can happen – but alas that is not what will happen after April 2017 under the peabody SMT plan.

  8. LT Shareholder

    January 5, 2017 at 9:18 pm

    Special hearing called for motion to approve equity committee in advance of Jan 26 Omnibus hearing. January 19. What could reasonable objections be based on, anything? that’s the question here.

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