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Peabody, Arch Resources Decision Puts Future Coal Deals in Limbo

Oct. 2, 2020, 10:00 AM

Coal company mergers face an uncertain, but not doomed, future after Peabody Energy Corp. and Arch Resources Inc. failed to secure court approval for their proposed joint venture, according to industry analysts and attorneys.

Peabody and Arch called off their deal Sept. 29 after a federal judge in Missouri granted a request from the Federal Trade Commission to block the joint venture over concerns it would drive up the price of coal in the South Powder River Basin of Wyoming.

“The greatest impact of the court decision is the increased uncertainty that it creates in the consolidation process,” said Robert Godby, a professor at the University of Wyoming who studies the coal industry.

But Peabody and Arch’s insurmountable legal hurdle shouldn’t automatically deter other coal companies from considering consolidation, said Julie Elmer, a former Justice Department antitrust trial attorney.

“I do think this case involves a unique market and it doesn’t necessarily mean the end of all coal mergers,” according to Elmer, now a partner at Freshfields Bruckhaus Deringer LLP.

Those companies that can meet a stringent economic test, called the failing firm defense, can still try consolidating, she said. The same is true for smaller coal companies in different parts of the country, Elmer said.

At their antitrust hearing, Arch and Peabody each said they needed the deal to survive alongside other energy alternatives, including natural gas and other renewables. But neither company offered the type of legal defense that would require a judge to set aside antitrust concerns in light of troubling finances, Elmer said.

“I think that a firm that can meet those legal requirements can still get a deal through,” she said.

Distinct Market

Judge Sarah Pitlyk of the U.S. District Court for the Eastern District of Missouri admitted in her 88-page opinion that the coal industry faces significant economic challenges as it is forced to compete with lower-cost alternatives.

Nevertheless, the market for coal in the South Powder River Basin is a distinct market, and other energy sources can’t be taken into consideration in deciding this case, Pitlyk said.

The FTC presented enough evidence to prove that its market definition in the case—coal produced in the SPRB—is distinct and unique enough to be considered on its own, separated from other energy sources, she said. The joint venture would control more than 50% of all SPRB coal produced, the judge said.

Within hours of the ruling, Arch and Peabody announced they would terminate their deal and not seek to appeal.

Arch is now considering divesting its thermal coal assets as it aims to focus more on steel and metallurgical markets, the company said in a statement.

Divest Versus Invest

Arch’s immediate reaction to sell off its thermal coal assets is a recurring trend in the coal industry, said Clark Williams-Derry, an analyst for the nonprofit Institute for Energy Economics & Financial Analysis.

“In some ways, it’s a tidal wave of thermal coal companies that have some assets and they are trying to get rid of their thermal coal assets,” he said.

Williams-Derry says he doesn’t see further consolidation in the industry, especially among big companies that already dominate large shares of the coal mining market. “Mine reclamation is really becoming the tail wagging the dog,” he said.

But Arch’s reaction to the court’s decision shows that the company had an alternative plan, and a joint venture wasn’t the be-all and end-all to the company’s survival, Elmer said.

“My reading of the opinion is that the defendant merely argued that the coal industry as a whole was struggling generally and that type of argument has never been a defense to an anti-competitive merger,” Elmer said.

Failing Firm, Flailing Firm

Coal companies that still seek to merge rather than sell of their assets can try the failing firm defense.

For that to work, a company must prove it’s unable to meet its financial obligations in the near future, it can’t reorganize under bankruptcy, and it has made unsuccessful “good-faith” efforts to find alternative offers that pose less severe competition problems.

Companies also can attempt to cite the less stringent ‘flailing firm’ defense, in which a company isn’t on the verge of bankruptcy, but also isn’t very strong financially and likely can’t compete effectively.

“There very well could be players in this industry that could establish the failing firm defense or successfully support a weakened competition argument which might push a transaction forward even in a concentrated industry like this one,” Elmer said.

“It’s just that these defendants did not do that here,” she said.

To contact the reporter on this story: Victoria Graham in Washington at vgraham@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com