Since the CEO of Massey Energy Co. (NYSE: MEE) resigned earlier this month, the odds improved that the company would either be acquired or that it might go through a reverse takeover. The Wall Street Journal reports today that Alpha Natural Resources Inc. (NYSE: ANR) has made an offer for Massey, but does not report a price. Both Massey and Alpha are mum on the subject, and it is widely known that Massey is in-play.

Alpha has been rumored to be interested in acquiring Massey since Massey first revealed in mid-October that it was exploring strategic options on its future. The company is reeling from an explosion that killed 29 miners at its Upper Big Branch Mine in April. Massey’s share fell to a 52-week low in July, but has since recovered almost all that loss.

The share price recovery is likely due to an overall enthusiasm for the coal sector, and to the possibility of more than one offer for Massey. Luxembourg-based ArcelorMittal (NYSE: MT) may be interested in acquiring Massey. Massey’s 1.3 billion tons of metallurgical coal reserves is second only to Alpha’s reserves. ArcelorMittal, the world’s largest steelmaker, interest in Massey also derives from those reserves of metallurgical coal, which is a primary ingredient in steelmaking.

Just yesterday, analysts from FBR Capital raised their ratings on three coal miners and sharply boosted their share-price targets.  One upgrade was handed out to Patriot Coal Corp. (NYSE: PCX), which along with International Coal Group Inc. (NYSE: ICO) has been mentioned as a possible reserve takeover target for Massey.

Both Patriot and International carry market caps of around $1.5 billion, smaller than Massey’s market cap of almost $5.4 billion. A deal with either that included putting the acquired company’s management in place at Massey could be very enticing if the offer were generous enough to other shareholders. Massey’s potential liability resulting from the mine explosion is probably the single biggest reason that the company didn’t get an upgrade yesterday as well. FBR Capital actually downgraded Massey from ‘Outperform’ to ‘Market Perform’ in late November.

Massey’s board of directors claims that it is not anywhere near a decision on whether to sell or buy, saying that wading through all the options and parties takes time. So, what is the board thinking?

First of all, Alpha may not be able to offer enough to buy the company. It is larger than Massey, but it just acquired Foundation Coal last year for $2 billion and it still carries some debt from that deal. Based on a recent deal in which Walter Energy Inc. (NYSE: WLT) acquired Western Coal Corp. (OTC: WTNCF) for $3.3 billion, Massey could be worth more than double its current market cap. Western Coal owns metallurgical coal reserves that are about one-tenth the size of Massey’s.

ArcelorMittal, with its $57 billion market cap, could probably put together a deal for Massey, but the company has to worry about iron ore supply and prices as well as prices and supplies of coal. ArcelorMittal would surely try to get a significant discount based on potential liabilities, and the Massey board probably won’t go for that.

That leaves the reverse takeover. This seems the likeliest path. It’s flaw, of course, is that Massey shareholders don’t get a big pay-day, but that’s probably not going to happen anyway. At least this kind of deal, with Patriot or International Coal or some other company, protects the value of Massey’s reserves and promises a nice payoff over time.

Coal mining stocks are having another good day today, with most shares up between 1.5% and 4%. The Market Vectors Coal ETF (NYSE: KOL) is also up about 1.5% in the first hour of trading.

Paul Ausick

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