Macarthur Coal Lures Bidders as Peabody Rouses China: Real M&A

Macarthur Coal Lures Bidders as Peabody Rouses China
Coal trucks operate at Macarthur Coal Ltd.'s Coppabella Mine southwest of Mackay in Queensland, Australia. Macarthur, the world’s biggest maker of pulverized coal, said it’s in talks with other potential bidders as takeovers of coal companies reach $19 billion so far this year, topping the annual record set in 2010. Source: Macarthur Coal Ltd. via Bloomberg

Peabody Energy Corp. is leaving the door open for a rival bidder to step in for Macarthur Coal Ltd. by offering less for the Australian mining company than it did last year, even as profit is projected to double.

Peabody, along with the world’s largest steelmaker ArcelorMittal, is taking the bid of A$15.50 a share directly to shareholders after Macarthur’s board demanded A$18 a share. In early 2010 Peabody sought to acquire Brisbane-based Macarthur for as much as A$16 a share before terminating the offer. While flooding in Australia has hampered production, net income will double in fiscal 2012 from 2010 as coal trades near a record, according to analysts’ estimates compiled by Bloomberg.

Macarthur, the world’s biggest maker of pulverized coal, said it’s in talks with other potential bidders as takeovers of coal companies reach $19 billion so far this year, topping the annual record set in 2010. While the current proposal is comparable to other industry deals this year relative to 2012 earnings, Macarthur’s stock is trading above the offer as some shareholders bet on a higher price tag. Macarthur’s largest investor, Chinese metals producer Citic Group, may join a counterbid, according to IG Markets.

“They’ve got a fantastic asset based on very good growth prospects,” Chris Weston, an institutional dealer at IG Markets in Melbourne, said in a telephone interview. “If you mix that in with the strong coal demand that’s increasing then you can see why people would want to get their hands on their assets, especially steel producers, as well as the coal companies.”

All-Cash Bid

Martin Debelle, a spokesman for Macarthur, declined to comment on other potential acquirers. Giles Read, a spokesman for Luxembourg-based ArcelorMittal, declined to comment beyond the company’s Aug. 1 statement.

“Bids are generally based on a premium to where the share price is as opposed to any historic offers that may not have been accepted in the past,” Vic Svec, a spokesman for St. Louis-based Peabody, the largest U.S. coal producer, said in a phone interview. “It’s a very healthy premium by any standards.”

The all-cash offer from Peabody and ArcelorMittal, which already own 16 percent of Macarthur, values the company’s equity at about A$4.7 billion ($5 billion) plus about A$415 million in net cash, according to data compiled by Bloomberg. It represents a 43 percent premium to the 20-day stock average before the proposal was announced July 11.

Talks with Bidders

The bidders said Aug. 1 they will take their proposal directly to shareholders after failing to reach an agreement over price with the mining company’s board. Macarthur, which demanded as much as A$18 a share, said it’s continuing talks with Peabody and ArcelorMittal, and other interested parties.

Since the unsolicited bid was announced, Macarthur has gained 42 percent to A$15.75 yesterday, 25 cents above the bid, indicating that some investors are betting on a higher offer. The shares closed as high as A$15.86 on Aug. 2.

“The market is saying there’s a chance that there’s a lift in the offer from Peabody and ArcelorMittal or that another company comes in,” Tom Sartor, a mining analyst at RBS Morgans Ltd., said in a telephone interview from Brisbane. “These types of assets are fairly scarce. The scarcer the product, the more expensive it becomes.”

Peabody fell 9.2 percent to $49.05 at today, the biggest decline since June 2009. ArcelorMittal dropped 5.9 percent to

18.32 euros, the lowest price since May 2009. Macarthur rose 0.2 percent to A$15.78.

Rejected 2010 Bid

This marks the second time in two years Peabody has tried to buy Macarthur in an attempt to expand its coal operations in Australia and extract cost savings, Sartor said. Macarthur has mines for pulverized coal, used to make the steel in cars and buildings, in Queensland, Australia, which is the biggest exporter of the fuel. ArcelorMittal would be able to better hedge steel production costs as a result of the deal, he said.

Macarthur rejected a A$15-a-share bid from Peabody in May 2010 after it was reduced from A$16 because Australia, the biggest exporter of coal and iron ore, proposed a tax on resource profits that would hurt its investment. Macarthur said at the time that its two biggest shareholders, Citic and ArcelorMittal, were unlikely to support the bid.

“By offering less this time it leaves the window open for other players,” Sachin Shah, a special situations and merger arbitrage strategist at Tullet Prebon Plc, said in a telephone interview from Jersey City, New Jersey. “It also seems like Peabody and ArcelorMittal are saying that if there isn’t anybody else out there, why do you want us to pay A$16? They would want some kind of rationale for increasing their bid.”

More Outstanding Stock

While Peabody is offering less per share than in 2010, Macarthur sold stock in August 2010, boosting its outstanding shares by about 38 million. The current offer values the company’s total equity at A$4.7 billion, versus A$3.7 billion last year at the final offer price of A$15 per share.

“Macarthur has issued shares during that time so the dollar value of this bid is significantly higher,” Peabody spokesman Svec said. “The concept that somehow value is static over a 15-month period also isn’t accurate.”

Adjusted earnings are projected to increase to A$1.04 a share in the year ending June 2012, more than doubling from per-share profit of 49 cents in fiscal 2010, according to the average of analysts’ estimates compiled by Bloomberg. That means the current offer is valued at almost 15 times this year’s expected earnings, compared with Peabody’s previous high bid of A$16 a share equating to 33 times 2010 earnings, the data show.

Coal Takeovers

“It’s not like something materially happened where the business deteriorated,” Shah said. “You would assume that Peabody would be able to pay more rather than less, especially since they’ve teamed up with another very large entity.”

The proposal values Macarthur at 7.9 times analysts’ projected earnings before interest, taxes, depreciation and amortization for fiscal 2012. The median for coal takeovers greater than $1 billion completed this year was 6.7 times Ebitda, data compiled by Bloomberg show.

Takeovers announced in the coal industry have reached $19.1 billion so far this year, already exceeding the record $16.4 billion in all of 2010, according to data compiled by Bloomberg.

Coal prices have surged on rising demand to feed power stations and steel mills in China, the world’s largest user of coal, and amid global production disruptions, including record flooding in Queensland.

Credit Suisse Group AG last month raised its price forecasts for coking coal by an average of 15 percent for 2014-2018, citing “unrelenting” demand. Prices jumped 47 percent to a record $330 a metric ton in the second quarter.

‘Undervaluing’ Macarthur

While the price for pulverized coal that Macarthur produces more than doubled to $275 a ton in the second quarter of this year from 2009, it may decline to $158 a ton next year, Peter Hickson, UBS AG’s global head of commodity research and basic materials strategist, said in a presentation in July.

“To buy at the top of the market at the moment is a risk,” Peter Chilton, who helps manage about $790 million at Constellation Capital Management LLC in Sydney, said in a phone interview. “Coal prices are very high. They may stay high for some time, but they won’t be at these levels forever.”

Andrew Pedler, senior analyst at Wilson HTM Investment Group in Brisbane, said he expects a deal to reach A$18 a share instead of the current A$15.50.

“This price is effectively undervaluing Macarthur Coal’s portfolio of development projects,” Pedler said in a phone interview. “You cannot discount an alternative offer. At the same time you can’t necessarily bank on one being there.”

Citic Rival Bid

Macarthur may seek a rival bid that would involve its largest shareholder, China’s state-owned Citic, according to RBS Morgans’s Sartor. Citic’s director on the Macarthur board, Chen Zeng, hasn’t been involved in the board’s deal discussions and has taken a leave of absence to avoid a potential conflict of interest.

Citic or South Korea’s Posco, the third-largest shareholder in Macarthur, are the most likely to make a higher offer, said IG Markets’ Weston, because they already owned about 24.6 percent and 7 percent, as of May 2011, respectively. Citic and Posco invest in Macarthur for strategic reasons and may not want a cash offer without a remaining equity stake, Pedler said.

“Citic has been a long-time supporter of the company, and they’re in the best position to think about a counteroffer,” Sartor said.

Citic has no comment regarding the takeover for the moment, Amanda Xu, a Citic Resources Holdings Ltd. spokeswoman who works for PR Asia Consultants Ltd., said in a response to an e-mail. Chung Jae Woong, a Seoul-based spokesman for Posco, declined to comment on whether it would bid for Macarthur.

‘Preferred Product’

Anglo American Plc, a miner of coal, platinum and diamonds, and Vale SA, the world’s largest iron-ore producer, are also possible bidders, Constellation Capital’s Chilton said. James Wyatt-Tilby, a spokesman for London-based Anglo American, and Fatima Cristina, a spokeswoman for Vale in Rio de Janeiro, declined to comment on speculation.

Coal “is a very preferred product, so I wouldn’t be surprised if there is a higher bid,” Mitesh Thakkar, an analyst at FBR & Co., said in a phone interview from Arlington, Virginia. “The bigger picture is that metallurgical coal is in great demand for the steel mills.”

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