While most of the private equity market is keeping quiet and focusing on existing portfolios, the energy industry is once again causing a racket. Lehman Brothers Merchant Banking last month held a well-received initial public offering for Peabody Energy Corp., the world’s largest privately-owned coal company.
Peabody Energy made its debut on the New York Stock Exchange, with the symbol BTU, on May 22, offering 17.25million shares at $28/share. The shares opened at $36 on the first day and closed at $36.80. At press time, the stock was trading at $32.40.
If there is ever a time to take a coal company public, this is it. President George W. Bush and the Department of Energy have both recently announced energy plans that set coal technologies as a priority.
Alan Washkowitz, the head of the merchant banking group at Lehman, said that the firm had been keeping on an eye onthe performance of similar public companies, namely Arch Coal and CONSOL Energy, and found them to be performing “terrifically.” That, combined with the interest relayed from institutional investors, convinced Lehman that this was the right time. “It’s clear that most of these very big institutional investors think a sea change has happened in terms of coal,” he said. “Coal is now a legitimate major energy source that they all have to have in a big energy portfolio. So everything seemed right [for the IPO].”
Lehman first expressed interest in Peabody in 1989, when it made a failed attempt to acquire a stake in the company. Then in 1998, Lehman got a second chance and made it work. Texas Utilities Co., a Lehman client, made a move to acquire Energy Group, of which Peabody was then a part, but Texas Utilities, which owned U.S. coal assets, could not acquire Peabody even for a moment or the deal would be bogged down in red tape. Therefore, Lehman Brothers Merchant Banking stepped in and agreed to purchase Peabody simultaneously.
At closing, Texas Utilities took Energy Corp., without Peabody, for approximately $11 billion, and Lehman acquired 87% of Peabody for $2.4 billion, including some assumed debt. The financing for the deal included $480 million of equity from Lehman, a $920 million bank facility and $900 million of high-yield notes.
Lehman Brothers, which now has 59% of the company, did not sell any of its stake in the IPO, but following the offering the merchant bank sold down $60 million in equity to two of its investors.
The proceeds from the IPO will also go to paying down debt and should leave the company with approximately $1 billion in debt, said Washkowitz.
Throughout Lehman’s ownership the No. 1 priority for Peabody has been to lower its debt. Two sales generated the majority of the proceeds that Lehman used to pay down approximately $1 billion in debt in the last three years. Peabody sold Citizens Power, an energy trading business, to Edison Mission Energy, for which it received about $100 million. Then in January it sold an Australian coal business to Rio Tinto Plc in London for approximately $450 million, and the buyer assumed approximately $119 million in debt.