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Investor assails Walter Energy's accounting

by Michael D. Brown | Published April 18, 2013 at 9:33 AM

Activist investor Audley Capital Advisors LLP continued its push for change at Walter Energy Inc. on Wednesday, April 17, sending a letter to management asking it to change the coal mining company's accounting policies to be better aligned with its competitors.

Specifically, Audley is asking Walter management to provide a per ton cost analysis by geographic location instead of its current practice of lumping mining costs together, so that shareholders can see what the most cost-effective mines the company has.

The activist also wants Tampa, Fla.-based Walter to examine its per ton costs "compared to the average of its peer group since the completion of the Western Coal [Corp.] acquisition in April 2011," the letter stated.

Metallurgical, or met, coal is Walter's main product and is used as a fuel and as a key component in producing iron ore, which is used to form steel.

London-based Audley, a hedge fund, contends that Walter competitors such as Abingdon, Va.-based Alpha Natural Resources Inc., St. Louis' Arch Coal Inc. and Peabody Energy Corp., also of St. Louis, all report costs on a per ton basis, providing greater transparency on "arguably one of the most important metrics in met coal production."

Walter, which didn't immediately return calls, has been embroiled in a proxy contest with Audley since March 25 over the composition of its board and its recent M&A decisions.

Audley said in a letter March 25 that it wants to replace the entire 10-member board with its own slate at an annual meeting set for April 25 and then push for asset sales to invoke value in the company.

Walter's stock, which trades on the New York Stock Exchange as WLT, was trading at about $19 per share during midday trading Wednesday -- some 80% below the all-time high of $127.84 it hit in December 2010 after the Nov. 18, 2010, announcement that it was purchasing Western Coal for $3.3 billion. The deal was completed on April 1, 2011.

Audley blames the Western Coal acquisition as the main reason the company suffered such a steep decline in valuation. Not only did the company take on a significant amount of debt to fund the deal, but in last year's third quarter it also incurred a $1.1 billion charge related to restructuring Walter in its aftermath. The debt and charge have hurt Walter's balance sheet and subsequently income, Audley said.

Walter's debt pile stood at $4.76 billion for the quarter ended Dec. 31, just above the $4.72 billion in debt the company had in the same period of 2011. The company at the same time reported a net loss of $1.1 billion for the year on revenue of $2.4 billion.

Audley's proposed directors include Audley's managing partner, Julian Treger, as well as former coal and mining executives Eddie Scholtz, Mark Lochtenberg, Robert Stan and Lawrence Clark Jr.

Although proxy advisory firms Glass, Lewis & Co. LLC and Institutional Shareholder Services Inc. have already advised shareholders to vote against the proposed Audley directors, the hedgie continues to look toward an April 25 meeting to decide the fate of its activism.

"Stockholders have been presented with an opportunity to elect responsible, sophisticated new Board members," Treger wrote in the Wednesday letter.

A refreshed board, he went on, "should contribute not only to the superior oversight of the Company's operations and its balance sheet but also institute more stockholder-friendly corporate practices, including a higher level of transparent disclosures."

Audley's proxy advisers are Bruce Goldfarb, Charles Garske and Patrick McHugh of Okapi Partners LLC. Sard Verbinnen & Co.'s Dan Gagnier and Brian Shiver are heading Audley's public relations team.

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