* Western shareholders to get C$11.50/shr, a 56 pct premium
* Walter to buy 20 pct in Western from Audley Capital
* Walter Energy turns positive, after opening lower
* N.American coal sub-index gains (Adds detail, analyst comment; updates shares) (In U.S. dollars unless specified)
By Adveith Nair & Krishna N Das
BANGALORE, Nov 18 (Reuters) - U.S.-based Walter Energy Inc WLT.N WTN.L is in talks to buy Canadian peer Western Coal Corp WTN.TO for $3.24 billion, as miners scramble to tap surging demand in Asia for steelmaking coal.
Global steel demand is forecast to hit a record 1.34 billion tonnes in 2011, after 10 percent growth in top market China drove demand up more than expected this year.
Massey Energy MEE.N, India's state-run Coal India Ltd COAL.BO, Peabody Energy Corp (BTU.N), Alpha Natural Resources ANR.N and steelmaker ArcelorMittal ISPA.AS have been cited as potential buyers or targets in recent months. [ID:nN17226033]
Tampa, Florida-based Walter Energy offered C$11.50 a share in cash and stock for Western Coal -- about 56 percent more than its Wednesday close -- and agreed to buy about 20 percent of the Canadian firm's shares from Audley Capital affiliates at that price.
FACTBOX on coal M&A in the last six months [ID:nSGE6AH0II]
FACTBOX on role of coal in steel prodn [ID:nSGE6270A7]
FACTBOX on India's appetite for coal [ID:nSGE6850BQ]
FACTBOX on China's energy consumption [ID:nTOE66502J]
UBS analysts estimate Walter Energy's offer implied a coal price of about $208 a ton. In the third quarter, metallurgical coal prices averaged about $180 a ton.
Brian Gamble of Simmons & Co said the deal, which he said was expensive, was driven by a growing appetite for metallurgical, or coking, coal, which makes up more than three-quarters of Western Coal's portfolio.
"That implies the valuation should be high," Gamble said. "We've seen international assets go at a significant premium to U.S.-based assets."
If the deal is realized, Walter Energy and Western Coal would have combined reserves of about 385 million tons as well as access to major steel producing markets across the globe.
Western Coal has mines in British Columbia and West Virginia, while Walter energy has mines in the Appalachia in eastern United States.
Brean Murray Carret analysts, who are bullish on metallurgical coal, said a combined company would attract potential investors.
Western Coal makes itself all the more attractive for buyers as it ships using the relatively free Ridley terminals on the Pacific Coast, while Canadian peers Grande Cache Coal GCE.TO and Teck Resources TCKb.TO face congestion at Westshore, the country's largest coal export facility. [ID:nSGE69C0HQ]
DEMAND FUELS M&A
Shares of dual-listed, Vancouver-based Western Coal jumped more than 45 percent in both London and Toronto. Walter Energy shares edged lower in New York.
The Dow Jones U.S. Coal Index .DJUSCL -- which includes Arch Coal ACI.N, Alpha Natural, Peabody, Massey, Patriot Coal as well as Walter Energy -- was up 3.2 percent.
Higher steel demand has helped the index outpace the broader Dow Jones Industrial Average's .DJI 5 percent rise so far this year, and has driven speculation of growth in the sector through M&A, which analysts say will continue.
"We believe (Thursday's offer) is not going to be the last deal in the met coal space, given how quickly the market appears to be tightening," Brean Murray said.
The proposed deal comes amid a pick-up in M&A activity in the coal sector, but Simmons' Gamble said Walter Energy had probably priced other U.S. players out of making any rival bid.
"It's entirely possible that someone comes in and outbids Walter for the assets, (but) it has to be someone from the international market," he said.
Western Coal is advised by RBC Capital, and Walter Energy by Morgan Stanley & Co. ($1=1.020 Canadian Dollar) (Reporting by Adveith Nair, Krishna N Das and Sakthi Prasad in Bangalore; Editing by Jon Loades-Carter and Ian Geoghegan)