Biggest Coal Takeover No Easy Flip for Tinkler: Real M&A
Nathan Tinkler has held talks with banks to fund a bid for Sydney-based Whitehaven (WHC) Coal Ltd., according to people familiar with the matter, after his initial approach was rejected on June 13. The 36-year-old multimillionaire is seeking to acquire the 79 percent he doesn’t yet own of a company already trading at more than 38 times estimated earnings, making Whitehaven the most expensive coal mining company globally with a market value of more than $1 billion, data compiled by Bloomberg show.
Tinkler may now need to pay a 35 percent premium, valuing Whitehaven at A$5.6 billion ($5.6 billion), Macquarie Group Ltd. said, in the largest acquisition of an Australian coal company on record, the data show. While he would be buying a company that is targeting a fivefold increase in coal production by 2016, prices for the commodity are mired in their worst slump since the financial crisis. Tinkler may need to weather four more years of a bear market as the start of mining projects in Australia and exports from Indonesia and Colombia further depress prices for coal, Standard Chartered Plc. said.
“To do a deal like this, you have to be a lot more bullish on coal prices than the market is right now,” David Cotterell, a Sydney-based analyst at Nomura Holdings Inc., said in a phone interview. “Unless the market’s wrong, you could be waiting a long time to get your money back.”
Whitehaven, which fell as much as 4.6 percent today, ended up 1 percent at A$4.15 a share in Sydney trading.
Tim Allerton, a spokesman for Tinkler, declined to comment on his plans for Whitehaven, as did Kate Kerrison, a spokeswoman for Whitehaven.
Whitehaven on June 13 said it rejected a “conditional and incomplete” proposal related to a possible buyout led by Tinkler Group Pty. Tinkler held talks with banks including Barclays Plc, JPMorgan Chase & Co. and UBS AG to finance a bid, two people with knowledge of the matter, who asked not to be identified as the details are confidential, said this month. A bid may come as soon as next week, the Australian Financial Review reported on June 26, without saying where it got the information.
Tinkler’s offer came less than six weeks after he sold Brisbane-based Aston Resources Ltd., which controls the Maules Creek steelmaking coal project, and another company called Boardwalk Resources Pty, to Whitehaven. The A$2.5 billion deal, announced in December, made Tinkler the largest shareholder in Whitehaven. His 21 percent stake, valued at A$1.1 billion at the end of December, is worth A$874 million after a 22 percent drop in Whitehaven this year.
Acquiring the rest of Whitehaven would give Tinkler control of five mines in eastern Australia already in production, two under development and an additional five that are being explored, according to a May presentation from the company. The miner produces a mix of coking coal, used for steel making, and thermal coal, bought by power generators to make electricity.
Whitehaven, which put itself up for sale in October 2010 only to rebuff the bids it received as too low, traded as high as A$7.30 a share in April 2011. The stock ended yesterday at A$4.11 a share.
“It will be a crime for Whitehaven to be bought at these prices,” Andrew Pedler, an analyst at Wilson HTM Investment Group in Brisbane, said in a telephone interview. “Whitehaven is significantly undervalued.”
Even after Whitehaven slid 44 percent from its all-time high, the company is valued at more than 38 times analysts’ earnings estimates for the fiscal year ending this month, according to data compiled by Bloomberg. That’s more than any other global coal company with a market value exceeding $1 billion, and compares with a median of 11 times for the group, the data show.
Tinkler is making his approach even as analysts project an oversupplied market will keep the price of thermal coal, which accounts for 69 percent of Whitehaven’s output, depressed.
At $83.10 a metric ton, thermal coal at the Australian port of Newcastle is already down 25 percent this year through June 22, according to IHS McCloskey, a coal data provider. The Asian pricing benchmark is poised for its worst quarter since the aftermath of the collapse of Lehman Brothers Holdings Inc.
With U.S. coal-fired power generators increasingly switching to natural gas and freeing up more of the nation’s coal for export, and output in Australia, Indonesia and Colombia increasing, global coal export capacity will jump 85 percent by 2017, from the current limit of 1.2 billion metric tons, according to Standard Chartered.
More than 60 projects in eastern Australia are set to produce an additional 100 million tons of coal by the end of 2017, compared with Australia’s current annual coal exports of 300 million tons, Nomura said in a May 24 report.
Newcastle coal, which stood at $192.50 a ton in July 2008, will fetch $90 a ton in 2017, according to Goldman Sachs Group Inc. That matches Nomura’s “long-term” forecast for the fuel. The price of coking coal, which is set in negotiations between suppliers and steelmakers, fell to $206 a metric ton for the quarter ending June 30, from a peak of $330 a year before.
“There’s an awful lot of downward pressure on coal pricing,” said Peter Arden, senior research analyst at Ord Minnett Ltd. in Melbourne. “Returns will not be as good as they have been recently,” he said, referring to the profitability of running a coal producer.
To win over shareholders, Tinkler may have to offer A$5.53 a share, said Andrew Sullivan, a Sydney-based analyst at Macquarie. That would represent a 30 percent premium to the shares’ 30-day moving average before the first approach, Sullivan said in a June 19 note. It would also be a 35 percent premium to yesterday’s close, data compiled by Bloomberg show.
A bid at that level would value Whitehaven at about A$5.7 billion ($5.7 billion), including net debt of A$126 million. That would surpass the $4 billion acquisition of Macarthur Coal Ltd. by Peabody Energy Corp. (BTU) last year, making the takeover the largest of an Australian coal miner, the data show.
At that price, Tinkler would be paying almost 25 times Whitehaven’s operating income of A$233 million for the 12 months through December, data compiled by Bloomberg show.
Global coal mining companies with more than $1 billion in market value trade at a median enterprise value of 9.3 times operating income. In 15 takeovers of Australian coal miners over the last five years, the median multiple paid was 19.7 times, the data show.
Tinkler would be acquiring a company that expects to boost annual output to 25 million tons by June 2016, from a projected 5 million tons in the year ending this month. Whitehaven is also planning to increase coking coal to 60 percent of output by then, from 31 percent now, according to a May presentation. Both targets are dependent on the expansion of Whitehaven’s mines and the availability of rail and port capacity.
“Companies often make these production-growth forecasts, which can often prove more difficult to achieve than they initially expect,” Gareth James, an analyst at Morningstar Inc. with a hold rating on Whitehaven, said in a telephone interview. “There’s plenty of time between now and then for development delays, cost blowouts, that kind of thing.”
Already, Whitehaven has pushed back the start of production from its Maules Creek mine to early 2014, from mid-2013, according to analysts at UBS and Credit Suisse Group AG. In a May 31 note, Credit Suisse described the delay as “a big disappointment,” and said the cost of developing the mine may be as much as 10 percent higher than initially estimated because industry costs have risen since a feasibility study on the mine was completed in July 2011.
Tinkler, who moved to Singapore from Australia this year, built his near-$1 billion stake in Whitehaven in a series of transactions since 2006. He sold his house that year to help buy a A$30 million coal lease in Queensland, only to sell the asset to Macarthur Coal for cash and shares a year later.
In 2008, Tinkler sold his Macarthur Coal stake to steelmaker ArcelorMittal (MT) at a profit of about A$445 million. He then bought Maules Creek from Rio Tinto Group for A$480 million in August 2010.
Seeking funds to develop the project, Tinkler sold shares of Aston Resources the same month, to raise A$400 million. In December he signed the agreement to inject Aston Resources assets into Whitehaven. He also owns metal-mining projects, infrastructure investments, a horse-breeding operation, and the Newcastle Knights, a rugby league team.
Buying Whitehaven may now require holding onto a mine for longer than any Tinkler has ever owned.
“At the end of the day someone has to make those assets work better to generate better returns than they have previously,” Ord Minnett’s Arden said. “For the next year or so it’s going to be very difficult to make much money. He really needs to buy some time right now.”