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TORONTO (Reuters) - Teck Cominco TCKb.TO will buy Fording Canadian Coal Trust FDG_u.TO for $14.1 billion in cash and stock in a deal that will make it the world's No. 2 exporter of coal used in steel making, Teck said on Tuesday.
The deal will allow Teck to take advantage of metallurgical coal prices that have nearly tripled in the past year as demand has surged, particularly in Asian countries.
It also helps Teck fulfill its goal of increasing its exposure to non-exchange-traded commodities -- where it has more control of pricing -- and away from metals such as zinc, the price of which has dropped sharply since 2006.
Under the deal, Fording unitholders will receive $82.00 in cash and 0.245 of a Teck share per unit, an 11 percent premium on the New York-listed units as of Monday's close.
The friendly deal will see Vancouver, British Columbia-based Teck gain full ownership of the Elk Valley Coal Partnership, which is 60 percent owned by Fording. Teck already owns about 20 percent of Fording, and also the remaining 40 percent of Elk Valley.
"There's no integration risk here; we already manage the asset. We didn't have to do due diligence, we know them," Teck Cominco Chief Executive Don Lindsay said in an interview.
Fording units jumped $6.51, or 7.9 percent, to close $89.00 on the New York Stock Exchange, ending shy of the offer price of $92.24 a unit, based on Teck's closing price of $41.79.
In Toronto, Fording units jumped C$6.55, or 7.8 percent, to C$90.35, while Teck rose C$2.44, or 6 percent, at C$42.85.
Teck estimated the deal should provide a 50 percent boost to its 2009 core earnings, and immediately add to both earnings and cash flow.
Teck said last week that Elk Valley's negotiated coal price in 2008 rose to $275 a tonne from $93 in 2007.
The stronger coal prices realized by the industry prompted a surge in coal stocks, including Fording, which peaked in June. That rally has since evaporated, which provided an opening for Teck, said Lindsay.
"There's a lot of fear in the market and people are more willing to sell at a more reasonable valuation today than they were a month or five or six week ago, when the coal market was in a frenzy," he said.
The deal had been anticipated by some analysts since Fording said last December it would explore its strategic alternatives, including a possible sale. As a Fording shareholder and partner, Teck was seen as a logical buyer.
Michael Grandin, the chairman of the independent committee of Fording trustees, said the deal will allow investors to lock in the company's price before income trusts such as Fording are forced to convert to a regular corporate structure in 2011, which would likely hurt its valuation.
David Whetham, a fund manager at Scotia Cassels, which owns shares of Teck, said the strength of the deal is contingent on coal prices, which many feel will begin to fall in a couple of years.
"I think that's the biggest risk on the whole deal, that it's kind of predicated on the assumption that the coal prices stay high," he said.
Kerry Smith, an analyst who covers Teck Cominco for Haywood Securities, said he would prefer to have seen Teck pay less for the acquisition, but said the transaction looked accretive.
"To me, it looks like a pretty decent deal," he said.
He also noted the tax benefits of the takeover.
Since Fording's main asset is its royalty from the Elk Valley Partnership, the price paid by Teck will be tax deductible under Canadian tax law, Teck said.
Teck, long known as a top zinc player, has been diversifying away from the metal in recent years, a strategy that has proven wise as zinc prices have dropped nearly 60 percent from their late-2006 highs.
Teck's C$4.1 billion purchase of Aur Resources last year shifted the company's toward copper, and it is in the process of wrapping up a $415 million takeover of Global Copper GLQ.TO for its Relincho copper-molybdenum deposit in Chile.
The company also has holdings in the oil sands, and Lindsay said Teck could one day move into iron ore.
The transaction, which has been approved by Fording's board, will close by the end of October and is subject to regulatory approvals. It includes a $400 million break fee.
As part of the deal, Teck will issue 36.9 million class B shares for proceeds of about $1.5 billion. It will also take on $9.8 billion of debt, about half of which it suggests could be prepaid within the first 14 months of the acquisition.
Additional reporting by Scott Anderson and Scott Haggett; Editing by Bernadette Baum and Rob Wilson