Striking miners at an Alabama coal company want better pay and benefits from management, but they are pushing their case by focusing on the company’s former owners in the private equity industry.
Apollo Global Management, Blackstone and KKR were among the previous owners that shared the bulk of almost $800m in dividends after the company, Warrior Met Coal, was formed out of a bankruptcy reorganisation in 2016.
The miners’ union argues that those special payouts were made at their expense.
The labour stand-off has put a spotlight on “dividend recapitalisations”, in which a portfolio company borrows to pay a special dividend to its owners. Three US senators this month sent a letter to Apollo and Blackstone criticising their gains at Warrior, saying that they “appear[ed] to have made off like bandits”.
The scrutiny comes at a time when large private equity firms are earning strong profits and enjoying soaring valuations while they emphasise the importance of responsible environmental, social and governance practices.
Warrior produces metallurgical coal used by steel mills in Europe, South America and Asia. Employees in the United Mine Workers of America union went on strike in April.
Almost six years before, Warrior’s predecessor company Walter Energy had filed for bankruptcy protection, citing falling coal prices and high operating costs. “The Debtors suffer from crippling legacy labor costs, principally in the form of medical benefits and pension obligations, as well as insupportable hourly labor costs,” Walter wrote in court papers.
Senior creditors of Walter — which included Apollo, Blackstone and KKR — made a so-called “credit bid”, agreeing to buy its mines in exchange for their debt claims. The group additionally bought $200m of new Warrior shares.
As a part of the agreement with the federal bankruptcy court, the private equity firms were allowed to reject the prior labour contracts with the union, while the company’s pension scheme was terminated and taken over by the US government’s Pension Benefit Guaranty Corporation. Such moves are typical in corporate bankruptcy cases.
The cleansed balance sheet and improvement in the coal business quickly paid off for the new owners. Before its initial public offering in 2017, Warrior paid them a $190m dividend from cash on hand. A few months later it paid a $600m dividend funded with cash as well as a $350m debt offering.
The payments represented a good cash return: at the end of 2017, Warrior’s public equity value was $1.3bn.
Union officials claim the payouts to the investment groups drained the company’s financial resources.
“They are vulture capitalists,” said Phil Smith, an UMWA spokesman, referring to Warrior’s previous owners. “This company wouldn’t exist had the mineworkers not taken significant cuts in pay, health benefits and vacation time when it emerged from bankruptcy.”
The union contends that mine workers took a 20 per cent pay cut after the restructuring and also face higher healthcare costs than before.
People close to the private investors said that their acquisition and investment in Warrior saved jobs, while annual incomes of hourly workers has risen from $75,000 to nearly $100,000 between 2016 and 2021.
They also point out that private equity firms have no current stakes in the company. One Apollo executive who had remained on the board after its investment ended, Gareth Turner, resigned last week citing the time commitment required.
This year, coal prices have reached fresh highs as steel demand has recovered from the pandemic. Warrior has been unable to increase production even as it has lured replacement miners, however. In a November earnings call, chief executive Walter Scheller said the company could raise coal production by about 25 per cent if the strike were to be resolved, but warned of “further disruption to production and shipment activities” if it continued.
Warrior earlier this month announced that it had sold $350m in new junk bonds to refinance the 2017 debt offering that had been used to pay the second shareholder dividend.
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US senators Elizabeth Warren and Tammy Baldwin, both Democrats, and Bernie Sanders, an independent, asked in their letter to Apollo and Blackstone for information about their involvement at Warrior. Warren, of Massachusetts, has recently sponsored legislation that would curtail dividends paid by portfolio companies to their private equity owners.
Blackstone said the senators’ letter was “riddled with misleading statements and its characterisation of our broader business model is false”. Its credit business “partnered to save 1,400 jobs through its investment in a bankrupt company during a significant market downturn”, Blackstone said.
Apollo said its former investment in Warrior saved the company’s mining operations from the brink of collapse, allowed the company to reduce debt and invest in its business and preserved jobs in Alabama.
“During the time of Apollo’s investment until our ultimate exit in 2019, the company thrived — its stock price increased, they had positive relations with its workforce and the representative union, and employees, who rank among the top earners in Alabama, received significant pay increases and bonuses,” Apollo said.
KKR declined to comment.
Asked for comment, Warrior referred the Financial Times to a company website about the strike that said: “Our goals during the negotiation process remain unchanged — to provide employees with a competitive compensation package, while protecting jobs and the long-term viability of the Company in a highly volatile market.”
Coal companies have historically been aggressive dividend payers. Warrior paid an additional $580m in special dividends in 2018 and 2019.
“We view it as a pretty high-risk industry. When times are good, these companies can generate a fair amount of cash. When times are bad, cash flow gets depressed,” said Benjamin Nelson, coal industry analyst at Moody’s.
Warrior’s largest shareholder today is BlackRock, which holds a 14 per cent stake mainly through passive vehicles, records show.
Mine workers have demonstrated outside BlackRock’s Manhattan headquarters as they continue their strike.