Nicholas Watson in Prague -

The long-awaited consolidation of Central Europe's coal industry has yet to materialise, a fact exemplified by last year's failure of Czech coal mining group New World Resources (NWR) to acquire the Polish miner Lubelski Wegiel Bogdanka. Even so, industry experts say the driving forces behind any consolidation are still there and it's only a matter of time before this process kicks off.

That NWR was the first to make a move surprised no-one - after all, being a consolidator of the region's fragmented coal industry was a stated goal of financier Zdenek Bakala when he took his first step toward creating NWR in 2004 with the leveraged buyout of Czech coal group Karbon Invest, which owned the country's largest mine Ostravsko Karvinske Doly (OKD). In 2007, NWR was formed to house a collection of coal mining and coking operations, which today employs over 18,000 people.

Since then, a successful IPO on the London, Prague and Warsaw stock exchanges in 2008 that raised $2.2bn plus a far-ranging modernisation programme to improve the efficiency and profitability of NWR makes it stand out from the region's other smaller, ossified, inefficient, union-dominated and often loss-making mines, especially those in the Silesian coal basin which straddles the Czech Republic and Poland. "Everybody in the Silesian coal mining industry needs to go through a significant restructuring process - we are in great position because we have gone through the process and many of the things we've learned could be directly applied to any other Silesian coalminer," Marek Jelinek, chief financial officer of NWR, tells bne. "Another key reason is that we are listed on three stock exchanges and hopefully soon to join one of the FTSE indices on the back of our reincorporation [in the UK], which makes us the only one in the region with good access to the capital needed to drive this consolidation process."

On October 5, NWR launched a daring €857m hostile bid for Poland's only listed coal mine, Bogdanka. The offer was attractive on several measures: a 13% premium to the pre-announcement closing stock price and a 43% premium to the price the government charged Polish pension funds for a stake earlier that year. However, by the end of the following month the offer was allowed to lapse amid a degree of acrimony after NWR failed to get anywhere near the 75% of shareholder votes needed.

The main problem, as with most failed takeovers, was differing views on valuations - something that promises to plague future M&A takeover in the industry, reckon analysts. NWR said its offer, which valued Bogdanka at a price/earnings multiple of 18.1x and on a cash flow basis about 8.0x Ebitda, compared favourably with comparable transactions and trading multiples in the mining sector internationally, and so it refused to lift its bid. The Polish shareholders of Bogdanka, however, took a different line, especially over the mine's "Stefanow" expansion project, which is predicted to double capacity and to increase Bogdanka's share of the Polish hard coal market 12% by the year 2014. "I'm sure that in some shape or form, this will happen," says Jelinek. "But will it happen on time and on budget? We assign a certain probability to that happening, while other people assign a 100% probability to it happening, and that's where the disagreement existed."

However, price tells only half the story. This first ever hostile takeover attempt of a Polish company did not go down well in a country where nationalistic tendencies bubble under the surface. Bogdanka's management fought the takeover tooth and nail from the outset, enlisting the help of politicians glad to appeal to their constituents' less savoury views about rapacious foreign capitalists. Given that the Polish state views the country's private sector Open Pension Funds, which are big shareholders in Bogdanka, as quasi-public institutions, it was easy to apply the necessary pressure to see off the bid. "The majority of these shareholders are pension funds, which depend on good relations with the Treasury in order to gain access to other privatisation deals, which in the near future will include coal producer, Jastrzebska Spolka Weglowa. Hence the fact that the Polish government - which retained 2.3% in Bogdanka after its privatisation in 2009 - opposed the sale of the Polish mining group to a Czech entity was critical in directing the pension funds to reject the bid," says IHS Global Insight.

As one banker in the region summed it up: "The price wasn't right, and the politics wasn't right."

Merger pressure

For all that, the pressures forcing the region's coal mines toward consolidation haven't gone away - a fact that's been all but acknowledged by the Polish government, which appears to be trying to put the financially weak, but politically powerful, industry in as strong a position as possible before this M&A process kicks off in earnest.

During communist times, Silesian coal mines were a valuable source of scarce foreign currency and the miners a cosseted class of worker. But in the market economy, the mines have struggled to compete and the number of pits was cut from over 80 to around 30, while employment fell from more than 400,000 to about 100,000 today. Even so, the mines are too small to exist in an industry that's desperate for finance to modernise. The Financial Times quoted a mining analyst as estimating the Polish coal industry needs an infusion of about PLN20bn (€5bn) to modernise properly. "If you look at the Silesian mining industry, I just don't see why it should be as fragmented as it is today," says Jelinek. "Clearly, there are real synergies that can be created by combining the Silesian mining companies."

To prepare for the endgame, Polish media reported in April that the government is preparing to bulk up the mines through mergers and then float these on the Warsaw Stock Exchange. However, recent experience suggests this is unlikely to go smoothly.

The government is currently trying to privatise Jastrzebska Spolka Weglowa (JSW) in southern Poland - a state-owned company that owns five mines and employs more than 22,000 people. JSW is supposed to make its debut on the Warsaw Stock Exchange on June 30, but even though the government has promised to retain a majority stake, the unions are still up in arms and have launched a series of strikes in protest, arguing the privatisation plans would lead to a loss of jobs and benefits.

DnB Nord Securities analyst Mikolaj Saj says such shenanigans will only ultimately have a negative impact on the valuation of JSW - something that will please miners like NWR that are looking to buy up assets in Poland. "I wouldn't rule out at all a possible repeat of our [takeover] effort at some point in the future. I think, though, that it's very, very unlikley it would happen within 12 months or so," says Jelinek.